In general, no. When a beneficiary of a life insurance policy receives the death benefit, it’s not counted as the beneficiary’s taxable income. So if you died leaving a $500,000 death benefit from your policy, the beneficiary will not have to pay taxes on receiving that $500,000. However, if the beneficiary chooses to leave the death benefit paid in installments (rather than lump sum), the interest that accrues on each installment will generally be taxable to the beneficiary (at ordinary income tax rates).

The proceeds from your life insurance policy will be includable in your taxable estate for federal estate tax purposes. What that means is if the value of your taxable estate exceeds the federal estate tax exemption (currently $5.49 million per person), then the proceeds will be taxed. As you are evaluating your estate planning needs and if the value of your taxable estate approaches or exceeds the Federal estate tax exemption, there are some advanced estate planning techniques that you can use to help remove your life insurance policy from your taxable estate which would be beyond the scope of this post and which I would be happy to talk to you about.

 

 

 

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