Co-Founder, Coastal Financial Partners Group, California
For personally-owned policies, life insurance death benefits paid in a lump sum to the beneficiary are received income tax free - a unique and important benefit.
If the beneficiary is a business and that business owned the policy, the business is generally not subject to the regular corporate federal income tax on the death proceeds provided special requirements are satisfied for policies issued or materially modified since August 17, 2006).
Aside from being income tax free, life insurance proceeds can possibly be subject to state or federal estate taxes. The exempted amount is high at this time for federal estate taxes ($5,250,000) and some states do not have any state estate or inheritance taxes.
If the life insurance benefit pushes the estate over the exempted limit for state and/or federal estate taxes, whether the beneficiary helps pay those taxes would need to be determined.
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If the beneficiary is a business and that business owned the policy, the business is generally not subject to the regular corporate federal income tax on the death proceeds provided special requirements are satisfied for policies issued or materially modified since August 17, 2006).
If the life insurance benefit pushes the estate over the exempted limit for state and/or federal estate taxes, whether the beneficiary helps pay those taxes would need to be determined.