Is Life Insurance Taxable?

In general, life insurance proceeds are not considered taxable income for the beneficiaries. Here’s a breakdown of the tax implications:

• Death Benefit: The payout your beneficiaries receive upon your death is typically not subject to income tax. This is a significant advantage of life insurance, as it allows your beneficiaries to receive a substantial sum of money tax-free.

• Exceptions: There can be some exceptions to the tax-free benefit:

  • Interest Income: If the life insurance policy accumulates interest, any earnings on the interest might be taxable to the beneficiary.
  • Policy Transfers: If you transfer ownership of a life insurance policy shortly before your death, the proceeds might be subject to income tax for the beneficiary. It’s always best to consult with a tax advisor for such scenarios.

• Policy Lapse or Surrender: If you surrender a life insurance policy before your death (meaning you cancel it and receive the cash value), the amount you receive might be taxable as income, depending on the circumstances.