Is Life Insurance Taxable Income to the Beneficiary?
If you’re shopping for a life insurance policy, you may be wondering if life insurance is taxable. Income to the beneficiary is one of the main purposes of a life insurance plan. Typically, the death benefit of a life insurance policy is not subject to income tax. However, some exceptions may apply.
Life Insurance Benefits Not Subject to Income Tax
Here’s the good news. For the most part, the federal government doesn’t tax the proceeds benefits from a life insurance policy. When a policyholder dies and his or her beneficiaries receive a death benefit, that money generally isn’t reported as gross income, as far as the IRS is concerned. An exception is if you receive interest on a benefit — any interest that has been earned must be reported to the IRS and is potentially subject to income tax.
There are two main categories of life insurance policies:
- Permanent life insurance
A permanent (or cash value) life insurance plan provides coverage for the insured person's entire life. They also accumulate cash value over time.
- Term life insurance
Term life plans provide coverage for a set agreed-upon length of time, called a term. They do not accrue cash value like permanent policies.
Estate Taxes and Death Benefits
The issue of estate taxes can be complicated. There are circumstances in which your life insurance proceeds could be considered part of your estate, and therefore taxed.
In some instances, death benefits are paid to the deceased’s estate. This may happen if the beneficiary dies earlier than the policyholder and there’s no named contingent beneficiary. Because the insurance policy increases the estate’s value, the benefits may fall under the estate tax if your estate is large enough.
Speak with a financial adviser or tax professional to learn how estate taxes could come into play with your life insurance policy.
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Applications for life insurance may be subject to acceptance by insurer. Issuance of the policy may depend upon answers to health questions. Rates and coverage amounts depend upon the carrier selected. Your policy may be subject to underwriting approval. You will receive only the benefit amount in the policy issued.