Posted November 15th, 2019 by Amy Danise
The life insurance money you receive as a beneficiary when an insured person dies is generally not taxable. You do not have to report the money as income to the IRS.
But there are situations where life insurance proceeds could be taxable. Let’s take a look at some.
Taxable case No. 1: You surrendered a life insurance policy for cash
If you terminate a policy and take the cash value, any proceeds that exceed the cost of the policy must be reported as income. For example, investment gains within a cash value life insurance policy could mean you receive more than what you paid in when you surrender a policy. The life insurance company should send you Form 1099-R that shows the total proceeds and the taxable amount.
Taxable case No. 2: You received interest with a life insurance payout
If you’re the life insurance beneficiary and received interest in addition to the death benefit, the interest is taxed as income. Use IRS Form 1099-INT to report this.
This could happen if you’re receiving a life insurance payout in installments, with interest, or if your claim on a life insurance policy was long after the death of the insured person and the insurance company pays you interest with the death benefit. The life insurance benefit amount itself is still not taxable.
Taxable case No. 3: Your employer pays for more than $50,000 of group life insurance for you
The cost of employer-provided life insurance that’s worth above $50,000 is counted as income for tax purposes. The taxable amount is reduced by any part you’ve paid for the group life insurance. For more, see IRS publication 525 under “Employer-Provided Group Term Life Insurance.”
Taxable case No. 4: Your employer contributes to a retirement plan for you that includes life insurance
An employer’s contribution to a qualified retirement plan for you generally does not count as your income at the time it’s contributed. But if that plan includes life insurance, the cost of the insurance may have to be counted as income. For more, see IRS publication 525 under “Retirement Plan Contributions.”
Taxable case No. 5: You’re the beneficiary of a life insurance policy that was turned over to you for a price
In this case, benefits could be taxable. Work with a tax professional to see how the transaction can be handled so that you’re not taxed.
Taxable case No. 6: You received accelerated death benefits from your life insurance policy because you’re chronically ill
An accelerated death benefit lets you receive part or all of your own life insurance money, before death, if you have certain severe health conditions. The purpose is to provide money for long-term care medical expenses. If those accelerated death benefits were paid on a “per diem” or other periodic basis, the first $370 is not taxed (the IRS limit for 2019). But amounts you receive above $370 could be taxed as income. Per diem payments mean you receive a set amount every day even if it’s more than what you actually paid for long-term care.
If you’re chronically ill and received accelerated death benefits that were based on the long-term care costs you actually paid for, those benefits aren’t taxable.
People who receive accelerated death benefits because of terminal illness are not taxed on those benefits.
Taxable case No. 7: The life insurance proceeds went into an estate that’s taxable
When there’s no beneficiary named, life insurance money can end up in a person’s estate. If that estate is worth over $11.4 million, or the life insurance money pushes the estate value over that limit, the estate’s value above $11.4 million is subject to federal estate tax. Very few people have to worry about this because the exclusion limit is so high, and properly handling estate planning can avoid it.
Other taxable situations
There can be tax consequences with other life insurance situations, such as endowment contracts. See IRS publication 525 for descriptions.
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