Syndicated Financial Columnist, Host of the weekly talk show Steve Savant's Money, the Name of the Game, Scottsdale Arizona
Video Transcript: Today's question is, is life insurance taxable? Well, at death of the policy insured, the actual proceeds generally go to the beneficiaries of the policy, absolutely tax free. It takes about 60 days for it to process, and your beneficiaries will receive it. And of course, they can use that to pay off indebtedness, or to put money aside in some kind of investment for future obligations like college education or retirement of maybe a surviving spouse.
But the beauty of it is, sometimes you can use this for all kinds of ideas that you never thought about, including ongoing income for the surviving spouse; an idea that is really becoming much more popular today. Some business situations as well as some estate situations may incur a tax, depending upon how it's owned. But predominantly, most life insurance goes tax free to their beneficiaries.
Life insurance that is not left to the estate is generally not subject to income tax. If you are the beneficiary and choose to receive payments over time, rather than in a lump sum, you may pay income tax on the interest that is paid to you by the life insurance company. Also, if the policy was a modified endowment contract, or had more cash value than the original face amount, there may be some tax consequences. Most people receive their benefits tax free.
Life insurance left to the estate (either on purpose or by default, because no listed beneficiaries are alive) will be subject to probate expenses and taxes. Also, life insurance is subject to state and federal estate taxes if it exceeds the exempted amount and conditions.
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But the beauty of it is, sometimes you can use this for all kinds of ideas that you never thought about, including ongoing income for the surviving spouse; an idea that is really becoming much more popular today. Some business situations as well as some estate situations may incur a tax, depending upon how it's owned. But predominantly, most life insurance goes tax free to their beneficiaries.
Life insurance left to the estate (either on purpose or by default, because no listed beneficiaries are alive) will be subject to probate expenses and taxes. Also, life insurance is subject to state and federal estate taxes if it exceeds the exempted amount and conditions.