Many people who are considering a term life insurance policy may want to know what the tax benefits may be for their beneficiaries. Purchasing a term life insurance policy may enable beneficiaries to pay off estate taxes and may help ease the transfer of a business. Life insurance policies may be used as tools to help beneficiaries in the event of death; but how much can your beneficiaries receive of it when you pass on? It should be important to make sure they get the most money possible; many people are curious as to how much their beneficiaries can receive at the end of the day.
The answer is: generally, according to the Internal Revenue Service, life insurance benefits may not be subject to federal income tax. The fact that income derived from life insurance death benefits may not be taxable may cause people to invest in life insurance policies for their beneficiaries.
When are life insurance death benefits taxable?
If no beneficiaries are named on a life insurance policy, the death benefits of the policy could be considered a part of the estate of the deceased. In this case, estate taxes may be paid on the death benefit by those who inherit the estate (usually close relatives who were not named on the policy).
Another case when life insurance death benefits can be taxable is a situation in which the government may view a life insurance policy as an investment rather than as a gift to beneficiaries to cover expenses in the event of death. This could be the case when using a life insurance policy to help ease the transfer of a business to avoid paying estate taxes. However, each case varies and it may be best to consult a tax professional and/or a financial planner before deciding upon the intended use for a life insurance policy.
Finally, if someone sells off their own life insurance policy to another person, the proceeds are taxable, the IRS has.
The fact that the proceeds from life insurance are generally not taxed as income can be only one of the many benefits to owning a life insurance policy.
For more information on insurance options, please read “Understanding Death Benefit Life Insurance Payouts.”
