Co-Founder, Coastal Financial Partners Group, California
For personally-owned policies, life insurance death benefits paid in a lump sum to the beneficiary are received income tax free - a unique and important benefit.
If the beneficiary is a business and that business owned the policy, the business is generally not subject to the regular corporate federal income tax on the death proceeds provided special requirements are satisfied for policies issued or materially modified since August 17, 2006).
The beneficiary of a life insurance policy normally does not have to pay income taxes on the life insurance proceeds he/she received. If the amount of the estate with life insurance is over the limit ($5,250,000 in 2013), estate taxes need to be paid on the excess over that amount.
There are a few exceptions, but the beneficiaries of a life insurance policy receive the death benefit proceeds tax free 30 to 60 days after the required documentation is received and processed. To circumvent taxation for large estates an Irrevocable Life Insurance Trusts can own the policy and distribute the death benefit proceeds to the trust beneficiaries tax free.
Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
There are two types of taxes to consider. The beneficiary can receive the death benefit free of income tax. The amount of the benefit might be included in the computation for estate tax. The benefit can be taken in installments, or a lifetime income in which cases the interest earned after the death are subject to ordinary income tax.
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If the beneficiary is a business and that business owned the policy, the business is generally not subject to the regular corporate federal income tax on the death proceeds provided special requirements are satisfied for policies issued or materially modified since August 17, 2006).