Q: Are The Benefits From A Life Insurance Policy Taxable?
As long as some very simple rules are followed, the death benefit from a life insurance policy is always treated tax free from federal income taxes. There are a few situations where certain IRS or accounting rules, if violated, could make it a taxable event. If a business pays for a life insurance policy and deducts the cost of the policy as a business expense, which is not allowed, then the death benefit could then be taxed. Also, if the owner of the policy, the insured, and the beneficiary are three different people then the death benefit could be considered a gift and subject to tax. It is also advisable for individuals with larger estates to not be the owner of their own policies since the beneficiary may not be taxed but the value of the policy could be included in the owner’s estate tax valuation. These are infrequent situations and as mentioned the vast majority of life insurance proceeds are paid Federal and State income tax free.