YOU ASK:

Are life insurance benefits taxable?

WE ANSWER:

The answer can be "yes" or "no", depending on your particular situation. Generally, it is assumed that life insurance is not subject to income taxation, therefore the proceeds of a life policy are not taxable.

Under IRC Sec. 101, the death proceeds received are excluded from the gross income of the beneficiary, regardless of the type of insurance, of how the payment is made and who the proceeds are paid to. Death proceeds from single premium, term life insurance, periodic premium or flexible premium life insurance policies are received income tax free by the beneficiary regardless of whether the beneficiary is an individual, a corporation, a partnership, a trustee, or the insured's estate. (Treasury Regulation 1.101-1)

Therefore, if you receive life insurance benefits because you have been designated beneficiary by the policyholder, the proceeds are tax-free. However, if you have purchased a life insurance policy for money or property and named yourself beneficiary without having an insurable interest in the insured's life, as in a viatical settlement, the death benefit is subject to taxation.

Furthermore, the death benefit may also be subject to estate, gift or inheritance taxation, even if you have been named beneficiary by the policy owner by virtue of being the beneficiary's spouse, child or grandchild. This is why you should visit a qualified estate planner to see how the land lies in your situation and get a rough idea if how much your estate tax will be. They will help you calculate your potential estate tax by deducting your expenses and liabilities from your gross estate.

As far as group term life insurance is concerned, you owe income tax on any life insurance over $50,000 that your employer has provided, less the amount of the premiums.

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