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Typically, beneficiaries on a life insurance policy will not be required to pay income tax when they receive a death benefit, but there are certain exceptions to this rule. Understanding all of the tax implications involving a life insurance policy can help beneficiaries make the best decisions about how to handle proceeds received from a life insurance policy.
Most people choose life insurance to protect their loved ones and leave them in a better financial place. But will the recipients of the policy be stuck with a tax liability?
Are life insurance proceeds taxable?
You may be wondering, “Is life insurance taxable?” fast payday loan Henderson TN The IRS states that proceeds from a life insurance policy are not generally considered gross income for the beneficiary. However, there are exceptions. For example, interest received by a beneficiary as a result of the insured’s death should be reported as income. A beneficiary may also need to report some of the payout as taxable income if they receive it in exchange for cash or something else of valuable consideration, up to the total amount of what was expended.
When the payout comes in installments instead of a lump sum
There are two ways the benefit can be paid – as a single lump sum or in installments. Some people prefer to receive money over time to avoid spending the full amount. But they should be aware that the interest is taxable.
Jonathan Holloway, co-founder of , a digital life insurance brokerage explains, “If the payout is paid in installments, the interest that accrues on the payouts is taxable. The death benefit is not taxable, only the interest on installments.”
If the beneficiary is an estate
If the policyholder names an estate as the beneficiary in a life insurance policy, the process gets more complicated. If the death benefit pushes the estate’s value over $11,700,000, your beneficiaries will have to file an IRS Form 706, also named the “United States Estate (and Generation-Skipping Transfer) Tax Return.” Leaving the proceeds to an estate adds to its value, which could lead to higher estate taxes for your heirs.