How Are Life Insurance Proceeds Taxed At Death?

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    Peggy Mace
    Most of the U.S.
    Life insurance proceeds are exempt from income tax. If there is a part of the life insurance policy that is income earned beyond the death benefit (such as dividends or interest), that will usually be taxable. Also, if the policy is a MEC (modified endowment contract), income tax would be paid. If the proceeds are large enough to warrant estate taxes, federal estate taxed may need to be paid, depending on how the policy was set up.
    Answered on July 18, 2013
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