Dr. Friday clarifies that while most inherited life insurance proceeds are tax-free, cashing in a whole life policy can result in taxable gains due to accumulated growth.

Transcript – Formatted for readability:

G’day, I’m Dr. Friday, president of Dr. Friday’s Tax and Financial Firm. To get more info, go to www.drfriday.com. This is a one-minute moment.

I was asked a question last week about life insurance: Is it always tax-free? And the answer is no. It’s not always tax-free. One of the main things to consider with life insurance is that if you cash in your own policy—particularly whole life—sometimes people reach a point where they no longer need it. If you do cash it in, the gain on the amount paid is taxable income because it’s considered growth, much like investing in a stock or savings bond. So, keep in mind that if you inherit a policy or receive life insurance proceeds after someone passes away, 99% of the time, that money is tax-free.

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