Are the Benefits from a Life Insurance Policy Taxable?

As long as some very simple rules are followed, the death benefit from a life insurance policy is free from federal income taxes. There are a few situations where certain IRS or accounting rules, if violated, could make it a taxable event. For instance, if a business pays for a life insurance policy and deducts the cost of the policy as a business expense, which is not allowed, the death benefit could then be taxed. Another instance is if the owner of the policy, the insured, and the beneficiary are three different people – in this case, the death benefit could be considered a gift, and thus subject to tax. It is also advisable for individuals with larger estates not to be the owner of their policy since although the beneficiary may not be taxed, the value of the policy could be included in the owner’s estate tax valuation. These are uncommon situations, leaving the vast majority of life insurance proceeds untaxed.