Is term life insurance taxable?

In general, the death benefit from a term life insurance policy isn't subject to income taxes when the beneficiary receives the proceeds as a lump sum. However, there are situations where taxes may be assessed.

The beneficiary may choose to receive the death benefit as a series of payments over several years instead of a lump sum. If they select this payment method, the insurance company usually places the life insurance proceeds in an account that may accrue interest until the full benefit has been paid out. Beneficiaries will have to pay income taxes on any interest that accrues.

Life insurance proceds may be included in the estate of the deceased. If the value of the estate exceeds the federal estate tax threshold, which was $11.7 million as of 2021, estate taxes must be paid on the amount that's over the limit. Some states also assess inheritance or estate taxes, depending on the estate's value and where the deceased lived.

Some insurers offer accelerated death benefit riders that allow the policyholder to access part of the policy's death benefit while they're alive to help pay for expenses related to a terminal illness. If you use the policy's accelerated death benefit, you don't have to pay income taxes on the money you receive, but it will reduce the amount your beneficiary gets when you die.

Is whole life insurance taxable?

Like a term life insurance policy, the death benefit from whole life insurance isn't usually subject to income taxes unless you receive the payout in installments, or subject to estate taxes unless the value of the estate exceeds the estate tax threshold. But if you access the policy's cash value, surrender your policy to the insurer, or sell it to a third party, you might have to pay income taxes.

When you buy whole life insurance, the insurance company splits your premium between a cash value account and the policy's life insurance costs. As the cash value increases, you can choose to withdraw money or take out a loan against it. If you withdraw more than your cumulative premium payments, you have to pay income taxes on the excess. In addition, most whole life policies allow you to borrow against the cash value. If you take out a loan and the loan is still outstanding when the policy is terminated, the loan amount in excess of the cumulative premiums is subject to income taxes.

As your health and other life circumstances change, you may decide you don't need life insurance anymore. If you no longer want to keep the policy, you can surrender it to the insurance company in exchange for a cash payment. It's important to note that some companies might charge you a surrender fee to complete the transaction. If you surrender the policy and your surrender proceeds exceed the cumulative premiums, the excess will be subject to income taxes. But if the surrender value is less than the cumulative premiums you paid for the policy, you won't pay income taxes on the cash payment you receive from the insurer.

You can also sell your policy to a third party if you no longer want it. If the sales proceeds exceed your cumulative premiums, minus the portion of your premiums attributed to the cost of insurance, the excess is subject to income taxes.

Is employer-paid group life insurance taxable?

Some companies offer group life insurance to employees as a supplemental benefit. If you have less than $50,000 in coverage through your employer, you won't be responsible for paying taxes on the value of the coverage. But if the death benefit is greater than $50,000, the employer-paid premiums for coverage over $50,000 are subject to income taxes.

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