Life insurance is one of the most common policies held by millions of Americans. In 2021, the average age of life insurance holders has been dropped by two years, which shows the massive demand for these insurance plans.
While there are many people who receive insurance payouts from companies, it’s a wonder whether or not these gains are taxable. To keep it as short as possible, know that life insurance benefits aren’t taxable. However, not everything that’s inherited is tax-free.
You will continue paying federal income taxes on inherited 401(k) and IRA. But, that’s only if the proceeds are from a traditional or other retirement account funded with pre-tax dollars. If your spouse or parent inherited you a Roth IRA or 401(k), withdrawals have no tax obligations as the taxes have already been paid.
Limit on insurance payouts to life insurance beneficiaries
Per IRS guidelines, there is no limit on the life insurance benefits. Whether you receive $3,000 or $300,000, you won’t pay federal income taxes. However, this doesn’t mean that there aren’t any limits imposed on this.
Though this is not related to the Internal Revenue Service, insurance companies have a limit on the payout. The maximum payout, for the time being, is 25 times the annual income of the deceased individual. For example, if the annual income of the life insurance policyholder was $50,000, the maximum payout is going to be $1.25 million. Make the calculation accordingly and figure out the maximum payout.
Number of life insurance policies
While there is a limit on the insurance payout, there are no legal limits on the number of insurance policies you can hold. As long as you qualify under the insurance company’s terms, you can have countless life insurance policies.
Though this gets tricky as only a handful of insurance companies will accept signing you up after going through an extensive check, considering the number of insurance policies you have already. There is no limit on how many insurance policies you can have, from five to ten to fifteen to eternity.