Generally speaking, NO. Life insurance proceeds are income-tax free. If you have a $500,000 life insurance policy and you pass away, your beneficiaries will receive the full $500,000 and it will NOT be taxed. This is one of the great advantages of life insurance as it is one of the few items that remain tax-free for most people.
However, if you have a large estate ($5.25 million in 2013) your entire estate including the life insurance proceed is subject to the federal estate-tax which is currently at 40%. As for the state inheritance tax, each state and county vary so it’s best to look at the list of state estate and inheritance taxes.
There are ways to properly structure your estate to minimize the impact of taxes for those with a high-net-worth. These topics will have links below this post for further reading.
Any interest earned on permanent life insurance such as whole life or universal life is subject to tax. Also, if the beneficiary takes the life insurance proceeds in installment payments versus a lump sum payment then the interest earned is taxable.
For the vast majority of people life insurance proceeds will not be taxed. If you have a $250,000 life insurance policy and you pass away your family will receive the full $250,000. For those who have a high-net-worth your life insurance proceeds and estate may be subject the federal estate-tax by the IRS and a local state or inheritance tax by your state or county government.
See What Rates You Qualify for, choose your state below.
- The Importance of a Life Insurance Trust for Estate Planning
- How Life Insurance Can Preserve Your Estate and Legacy
*This article is for informational purposes only and is not a substitute for tax or legal advice. Tax laws and rates constantly change, please consult with a tax or legal professional.