Is Term Life Insurance Taxable?
Term life insurance is not taxable if the death benefits are payable to a named beneficiary (which must be a real person).
However, there are several situations where term life insurance proceeds may become taxable, such as in the following situations:
Estate named as beneficiary: The death benefit proceeds may be considered part of your estate and could be subject to federal or state estate taxes.
Incidents of ownership: This situation occurs if you cancel, surrender, pledge or assign your life insurance policy or have the ability to change the name of the beneficiary. Under any of these circumstances, the proceeds may be taxable.
Third party ownership: This occurs when one person buys a life insurance policy (the owner of the policy) for another person (the insured) who then designates another person as the beneficiary. An example might be if a parent buys a life insurance policy for a child who then designates his or her spouse as the beneficiary of the policy. The spouse could be seen as receiving the life insurance proceeds as a gift which might be considered as taxable.
It’s always best to seek the advice of your professional financial advisor, tax advisor or your life insurance agent when you are buying a life insurance policy, naming your beneficiaries, and making any changes to your life insurance policy, as to whether those choices may result in any tax consequences.
Learn more about life insurance and taxes