Most life insurance proceeds are received free of any income tax. There are situations where the beneficiary may be responsible for paying income tax on the proceeds.
Death benefits paid on a viaticized life insurance policy comes to mind.
In some cases death benefits will be included in the estate of the insured and subject to estate taxes.
Co-Founder, Coastal Financial Partners Group, California
Life insurance proceeds, the death benefit, are generally received income tax free by the beneficiary in most cases. 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.
Generally life insurance proceeds are paid to the policy beneficiaries tax free. There are exceptions to this general statement. The policy proceeds could be includable in the policy owner’s estate and the estate is greater than the undefined credit or state exemptions. The policy proceeds could be taxed in some business scenarios as well.
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Death benefits paid on a viaticized life insurance policy comes to mind.
In some cases death benefits will be included in the estate of the insured and subject to estate taxes.
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.