1. 1000 POINTS
    Tyler MaddoxPRO
    Retirement Specialist, Cambridge Financial Group, Greenville, SC
    Death Benefit Payments to a Beneficiary DO NOT count as Taxable Income.

    However, if paid to a persons Estate, and not directly to an Individual; the Death Benefit payment will be taxed along with the rest of the Estate.

    Also, all Death Benefit Payments are subject to Federal Estate Tax, even for a direct Beneficiary.
    This means that any Death Benefit Payment OVER the Estate Tax Exemption (currently $5.25 Million) is taxed at the Estate Tax Rate (currently 40%). But obviously most people do not have policies with Death Benefits over $5 million. So this applies to very few people.
    Answered on April 3, 2013
  2. 25 POINTS
    Kirby Thornton
    Let me add a few other cases to the previous answer.

    While as a general rule life insurance death benefits are not taxable, there are a few more cases that can be taxable.

    Not only are life insurance death benefits counted as an asset for Federal Estate Tax, it is also counted for any equivalent state tax. Many states have limits lower than federal limits and may become subject to state taxation should the entire value of the estate exceed the state exemption.

    Also, it is important to avoid the Goodman Triangle. There are three parties involved in a life insurance contract, besides the insurance company. There is the insured, the person being covered, the owner, the person who controls the policy and typically pays the premium, and the beneficiary, the person named to receive the death benefit. It is important that at least two of these be in common to avoid Federal Income Tax. That means the owner should be either the insured or the beneficiary.

    To be safe, work with an insurance professional who is familiar with these rules to help you avoid problems. Finally, should you be concerned that the benefit will be taxable it would be wise to consult with a tax professional who is familiar with both Federal rules and the rules of your state.
    Answered on April 3, 2013
  3. 4330 POINTS
    Jerry Vanderzanden, CLU, ChFCPRO
    Co-Founder, Coastal Financial Partners Group, California
    In general, yes, the life insurance death benefit is income tax-free (IRC Section 101(a)). But, there are situations where this benefit may be lost.

    If too much premium is paid into the policy in violation of Section 7702 of the IRC, the policy is no longer considered life insurance, and the death benefit is income taxable. Insurance companies monitor this and usually take action to prevent such violations.

    Insurance professionals worry more about the following more common situations where the death benefit can be taxable since the burden is on the policy owner to monitor and violations are usually not caught before it is too late.

    1. Since 2006, new rules apply to life insurance in a business context which subjects the life insurance death benefit to income tax. If the policy does not meet the special requirements of Section 101(j)—such as the notice and consent or protected class requirements—the death benefit may be income taxable. There is also an annual IRS reporting requirement (Form 8925). We find most small business owners are not aware, especially of the latter requirement. Most tax professionals are usually not aware either. This is a common and growing problem which generally cannot be corrected (except to cancel policies and start over).

    2. Three parties to a policy (aka Goodman triangle): If a third-party owner names a different third-party beneficiary of a life contract, the proceeds may be income taxable or gift taxable.

    3. If the policy falls within the transfer-for-value rule and does not qualify for a safe-harbor exception, its death benefit is income taxable.

    Business owners should meet with a life insurance professional who can perform a comprehensive policy review and can coordinate with your tax and legal advisors.

    These comments are for planning purposes only and are not tax or legal advice.
    Answered on April 5, 2013
  4. 246 POINTS
    Ronald Mesler
    We Protect Doctors, LLC, Boise, ID
    Great question!

    For those with complicated scenarios or specific estate and business related implications please see the other excellent, in-depth responses to this question.

    But frankly for most people the answer is that death benefit amounts from life insurance are generally received free of taxes.

    As always, consult an expert in legal areas, tax preparation, or insurance to get the most accurate and up-to-date advice.

    Good luck!
    Answered on March 7, 2016
  5. Did you find these answers helpful?
    Yes
    No
    Go!

Add Your Answer To This Question

You must be logged in to add your answer.


<< Previous Question
Questions Home
Next Question >>