Co-Founder, Coastal Financial Partners Group, California
In most cases, life insurance proceeds, the death benefit, are 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.
Life insurance proceeds generally pass tax free for domestic planning purposes. However they may be taxed in the estate depending upon how large the estate is and if its size is larger than the federal unified credit or state of residence exemptions. In certain business scenarios life insurance proceeds it could be taxed, so it’s important to seek tax and legal counsel for guidance.
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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.