Are Life Insurance Proceeds Taxable? A Complete Guide
If you have the great fortune of holding down a job with fringe benefits like paid sick time and vacation, and health coverage through dental, vision and health insurance, you might also carry another benefit: group-term life insurance.
What is Life Insurance?
Insurance seeks to transfer risk from yourself to another party through the exchange of a stream of payments (premiums) for a lump-sum (or guaranteed stream of payments) at some point in the future. People who purchase life insurance pay premiums in exchange for receiving a death benefit to assist their beneficiaries with financial resources.
What is a Death Benefit?
The death benefit from a life insurance policy represents the amount paid to the beneficiary of the insured’s life insurance contract. At the insured’s death, the death benefit transfers to the policy beneficiary/(ies).
Are Life Insurance Proceeds Taxable?
For all life insurance policies meeting the definition of life insurance, any cash surrender value increases for the policy would not be taxed until received and the death proceeds would avoid taxation. In other words, generally speaking, life insurance proceeds (death benefit) do not have taxes paid against the proceeds.
Are Life Insurance Proceeds Included in Your Estate?
Before addressing whether life insurance proceeds are taxable to your estate, we first need to address the question of whether life insurance proceeds are included in your estate. Unless otherwise specified, life insurance proceeds are not part of your estate but instead go directly to the policy’s beneficiary and belong to them.
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