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 when the proceeds form a term life insurance policy may become taxable, such as:

Incidents of ownership: 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.

Estate named as beneficiary: The life insurance death benefit proceeds may be considered part of your estate and could be subject to federal or state estate taxes.

Third party ownership: This happens 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 beneficiary. The spouse could be seen as receiving the insurance proceeds as a gift which might be considered as taxable.

It’s always best to seek the advice of your 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 insurance policy, as to whether those choices may result in tax consequences.

Learn more about life insurance taxes.