What are the Tax Repercussions of the Life Insurance Death Benefit?

There is a simple answer to the question- Do I have to pay income tax on a death benefit?

The answer is no.

However, you may be subject to estate taxes if the deceased person owned his policy.  But, Federal Estate Tax doesn’t apply unless the estate is worth more than 3.5 million dollars (Although, some states have estate tax laws that might apply).

Other Tax Considerations for Life Insurance Policies

If you own a whole life policy and you remain current on your premiums, you will not to have to pay income tax on any of the following:

• Any dividends you’ve used to buy more insurance
• Any dividends you’ve taken in cash or used in other ways up to the amount you’ve paid in premiums
• Any unborrowed cash value that remains in the policy

The thing to remember is that taxes could become due if the policy is cancelled or terminated before the person passes away. Income taxes would have to be paid on any money received from the policy that’s more than the paid in premium.

So, it’s best to be aware of all of the tax ramifications inherent in your life insurance policies.