Is There a Tax on Life Insurance Benefits?

Free Insurance Comparison

Compare Quotes From Top Companies and Save

secured lock Secured with SHA-256 Encryption

UPDATED: Jul 16, 2021

Advertiser Disclosure

It’s all about you. We want to help you make the right legal decisions.

We strive to help you make confident insurance and legal decisions. Finding trusted and reliable insurance quotes and legal advice should be easy. This doesn’t influence our content. Our opinions are our own.

Written By: Jeffrey JohnsonUPDATED: Jul 16, 2021Fact Checked

Life insurance is generally not taxable, and beneficiaries typically do not have to worry about reporting the payments as income. There are life insurance taxes on any interest that you earn on benefit payments that you transfer into money making accounts, however, as long as the beneficiary is not the estate of the deceased there are not taxes on life insurance.

TIP: If you have chosen to make your estate your beneficiary, you could get hit with life insurance taxes! These funds would be considered part of your estate. A better approach is to make someone your beneficiary and designate them to pay any estate taxes with the proceeds.

Estate Taxes and Life Insurance

Estate taxes are levied only if your estate is worth over a certain amount. The majority of individual do not fall in this category. However if your life insurance death benefits puts your final estate in the area of $500,000 to $1,000,000 you may want to make sure you set up your life insurance beneficiaries properly to ensure they do not incur any unnecessary taxes. This is especially important with high value estates and if you have what is know as incidental of ownership in any policies. Incidental ownership is defined as any interests or rights that an individual maintains in an asset, including property and insurance, that allow the person to change, modify, use or benefit from that asset. As owner of the life insurance policy, you have control over the policy. This means you can cancel it, surrender it, borrow against it, pledge or assign it, or can change the beneficiary. Therefore if you die as the owner of a policy, the value of the policy is part of your estate and the proceeds of that life insurance policy may be taxed. You could reduce the size of your estate by possibly gifting assets to beneficiaries but to avoid estate tax on the gift, the original owner must not retain any incidents of ownership in the gifted assets.

TIP: If you have a spouse, forgo estate taxes on life insurance by making your spouse the beneficiary. But remember, taxes might be levied when your spouse dies. Talk to an experience estate planner to help you create ways to get around this.

How to Alleviate Life Insurance Taxes

There are things you can do to alleviate the taxes on life insurance beneficiaries. The best method is to create a trust. The trust can buy the life policy and prevent you every owning the life insurance policy thereby avoiding incidental ownership. In the case of making a minor child your beneficiary, creating an irrevocable trust will ensure the beneficiary can not be changed. There are some caveats to this: the government mandates that you must survive any transfer by three years or your estate will be taxed anyway. This type of law is not uncommon or unique to the federal government. When you use life insurance for estate planning, you should work with a life insurance attorney familiar with end of life benefit distribution.

These issues can get very complicated, and you don’t want to chance your death benefit being eaten up by taxes placed on life insurance beneficiaries. If you feel that your estate, including any life insurance death benefit, would potentially create an estate tax situation, ask an insurance professional to guide you.

If you think you would like also like to talk with a life insurance agent that can guide you in selecting the right life insurance policy, click here and a reputable agent will contact you today!

Read more articles about life insurance beneficiaries by clicking here.

Editorial Guidelines: We are a free online resource for anyone interested in learning more about legal topics and insurance. Our goal is to be an objective, third-party resource for everything legal and insurance related. We update our site regularly, and all content is reviewed by experts.

Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

Full Bio →

Written by Jeffrey Johnson
Insurance Lawyer Jeffrey Johnson

Free Insurance Quote Comparison

Enter your ZIP code below to compare cheap insurance rates.

secured lock Secured with SHA-256 Encryption