If you receive proceeds on a life insurance policy, whether in lump sum or in installments, the proceeds are not taxable income to the extent that the amount is not more than the face value of the policy. If you receive more money than the face value of the policy, the difference is considered interest on the life insurance policy and represents taxable interest according to the Internal Revenue Service. You must report all life insurance interest on your annual tax return.
Step 1
Review Form 1099-R issued to you by the insurance company to ensure the amounts reported are correct. Box 1--Gross distribution contains the entire amount of money disbursed to you for the life insurance policy. Box 2a--Taxable amount contains the interest amount paid as part of the gross distribution amount.
Step 2
Obtain a copy of IRS Schedule B--Interest and Ordinary Dividends, if the amount of interest earned on the insurance policy exceeds the minimum amount for direct reporting on Form 1040. You can download and print Schedule B from the IRS website.
Step 3
Enter the payer information and the amount received in interest in Part I of Schedule B along with any other taxable interest you earned during the year. Total all interest earned and enter the total amount of interest earned on the applicable box on Schedule B.
Step 4
Enter the total amount of interest from Schedule B, if prepared, or the amount of interest directly from the Form 1099-R on the Taxable Interest line in the Income section of Form 1040.
Step 5
Complete the remainder of your tax return as usual and file it with the Internal Revenue Service.
Tips and Warnings
- Tax preparation software makes preparing your tax return easier by prompting you with a series of questions about your financial information. The software will automatically complete the appropriate forms based on your answers. If you are not certain how to report interest on life insurance on your tax return and do not wish to try using tax preparation software, consider hiring a tax professional to assist you with preparation of your return.
Things You'll Need
- Form 1099-R
- Schedule B
- Form 1040
Member Comments