When is life insurance taxable?
Summary
Life insurance death benefits are generally not taxable income to beneficiaries, but some payments can create tax obligations. Taxes may apply to interest, cash value withdrawals, policy sales or surrenders, certain employer-provided coverage, and proceeds paid to an estate; the rules depend on the policy and circumstances.Key Facts
- A beneficiary who receives a death benefit as a lump sum usually does not owe income tax on it.
- When an insurer pays a death benefit in installments, interest paid above the policy’s value may be taxable.
- Cash value withdrawals may be taxable to the extent they exceed premiums paid into the policy.
- Selling or surrendering a policy may create taxable income if the amount received exceeds premiums paid.
- Employer-provided life insurance coverage above $50,000 may result in tax on the cost of the excess coverage, reduced by amounts the employee paid.
- Interest may be taxable when an insurer delays a death benefit and pays interest, or when a policy is withdrawn from or surrendered for more than the premiums paid.
- An unpaid policy loan may lead to taxes if the policy ends and the unpaid loan plus any cash received exceeds premiums paid.
- Proceeds paid to the policyholder’s estate instead of a named beneficiary could trigger estate taxes.
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