Co-Founder, Coastal Financial Partners Group, California
It doesn't matter what type of life insurance policy you have, term or permanent, the death benefit proceeds are normally not taxed as income. If it is in force at the moment the life insured dies, the death benefit will pay out.
In most cases, life insurance proceeds, the death benefit, are received income tax free by the beneficiary. This is a key feature of life insurance. Common exceptions include business-owned life insurance issued, or materially modified, after August 17, 2006 which may be taxable unless specific steps are taken during time of application and annually thereafter to meet conditions which allow the proceeds to be income tax-free. Another exception is a tax trap where life insurance contracts with three parties involved may also have unexpected taxable implications.
Death proceeds from a term life insurance policy could be subject to estate taxation and possibly ordinary income tax in some business scenarios and/or may even be subject to alternative minimum tax. In generally terms, life insurance proceeds go to tax free to the beneficiaries of the life insurance policy.
Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
A life insurance policy indemnifies the beneficiary for the loss of the insured. That relationship has to exist only at the time of application. The theory is that the death of the insured created an economic loss, the value of which was established at an earlier point in time (the death benefit.) A group of people with similar exposure to economic loss joined together to share the risk of this type of loss. When one person dies, the premiums paid into a fund provide a death benefit to offset the economic loss. For this reason there isn’t an income taxable event.
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In most cases, life insurance proceeds, the death benefit, are received income tax free by the beneficiary. This is a key feature of life insurance. Common exceptions include business-owned life insurance issued, or materially modified, after August 17, 2006 which may be taxable unless specific steps are taken during time of application and annually thereafter to meet conditions which allow the proceeds to be income tax-free. Another exception is a tax trap where life insurance contracts with three parties involved may also have unexpected taxable implications.