Is Life Insurance Taxable?

Life insurance death benefits aren't typically considered taxable income. However, there are some exceptions to this rule. Learn more about how life insurance benefits are paid out to beneficiaries and under what circumstances you may have to pay taxes on a policy's proceeds.

How Life Insurance Payouts Work

When the insured dies, the policy beneficiary must file a death claim to the insurance company and submit a certified copy of the death certificate. After a review process is completed, the policy payout goes to the named beneficiary(ies).

In many cases, you don't need to worry about paying income taxes on a life insurance death benefit. However, there are a few circumstances in which life insurance proceeds may be taxable:

When interest is generated

If your policy pays out the death benefit in installments instead of one lump sum, the benefit will generate interest. Anything you make on that interest could be taxed.

When you haven't paid back an outstanding loan on a permanent policy

If you have a permanent life insurance plan — like whole life or universal life — it generates cash value over the life of the policy. One benefit of this feature is that you can take out a loan against that cash value. If you owe money on the loan and you terminate the policy or stop paying your premiums, for example, you could owe taxes on a balance that's greater than what you've paid into it.

When a death benefit is paid to an estate

Estate taxes are levied on large estates — $5.49 million per person in 2017. If your estate is above this threshold, an estate tax may be applied to your life insurance proceeds.

Understanding Taxation on Life Insurance Proceeds

Consult with a licensed life insurance agent or tax professional when buying the policy to ensure your policy will produce the tax benefits you want.

To learn more, speak with a licensed agent at 1-855-303-4640 or read through the guides below.

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