Life insurance payouts aren’t usually taxable. But there are some exceptions you should be aware of if you have a policy or plan to purchase one. Let’s dive deeper into how beneficiaries and death benefits work, as well as when beneficiaries may need to pay taxes on life insurance.
A beneficiary is a person or entity that you can name in a life insurance policy to receive your death benefit upon your passing. You may choose one beneficiary or multiple beneficiaries, such as your spouse, adult children, a charity you believe in, a trust, or even a business. There are virtually no rules that restrict who you can pick. Additionally, you may change your beneficiary if you need to.1
The amount of money your insurance company will pay out to your beneficiaries if you pass away during your policy’s term is known as the death benefit. While the death benefit is typically paid out in a lump sum, your beneficiaries can choose other payment options. The amount they’ll receive depends on the face value of your policy minus any withdrawals from your cash value account or policy loans you didn’t repay.2
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In many cases, the money your beneficiaries receive from a life insurance payout is not taxed as income. However, there are a few exceptions that we’ll go over below.
Some common situations where beneficiaries might owe taxes on life insurance include:3
If life insurance proceeds have accumulated some interest, taxes are usually due. Fortunately, the amount that earned interest will be taxed, rather than the entire death benefit.
In the event a policyholder chose their estate as a life insurance beneficiary, taxes might apply. The taxes loved ones may pay depend on the estate’s value.
The person that buys a life insurance policy is usually considered the owner and insured. But if a different person holds each role, there may be taxes involved.
Fortunately, there are some strategies beneficiaries can use to avoid paying taxes on a life insurance payout, such as:3
When an estate is involved, whether life insurance proceeds are taxable is based on the policy’s ownership when the insured passes away. To avoid taxation, you can transfer ownership of your policy to another person or entity.
If you set up an irrevocable life insurance trust (ILIT), it will own the life insurance policy rather than you. This means the proceeds will not be included in your estate. You can state how you’d like the beneficiaries to receive or use the payout.
A gift tax comes into play if the life insurance policy’s cash value is higher than the gift tax exemption, which is $12.92 million or $17,000 per year as of 2023.3 It’s a good idea to ensure your cash value does not exceed this amount.
A death benefit can protect your loved ones financially upon your passing. The good news is that it’s not taxable in many cases. However, there are several exceptions you should know about and keep in mind when you set up your policy.
Aflac offers a variety of affordable term and whole life insurance plans that can help you meet your goals. Our plans come with fast and comprehensive coverage. Chat with an agent today to get a quote or more information.
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1 Insurance Information Institute - What is a Beneficiary? https://www.iii.org/article/whatbeneficiary. Accessed May 1, 2023.
2 Forbes - Life Insurance Death Benefits. Updated October 31, 2022. https://www.forbes.com/advisor/life-insurance/death-benefits/. Accessed May 1, 2023.
3 Investopedia - Do Beneficiaries Pay Taxes on Life Insurance? Updated December 7, 2022. https://www.investopedia.com/ask/answers/102015/do-beneficiaries-pay-taxes-lifeinsurance. asp. Accessed May 1, 2023.
Coverage is underwritten by American Family Life Assurance Company of Columbus. In New York, coverage is underwritten by American Family Life Assurance Company of New York.
68000 series: In Arkansas, Idaho, Oklahoma, Oregon, Pennsylvania, Texas, & Virginia, Policies: ICC1368100, ICC1368200, ICC1368300, ICC1368400. In Delaware, Policies A68100-A68400. In New York, NY68100-NY68400.65000 series: In Virginia, Policies ICC0965JTO & ICC0965JWO. B61000 series: In Arkansas, Idaho, Oklahoma, Oregon, Pennsylvania, Texas, & Virginia, Policies: ICC18B61JWO & ICC18B61JTO. In Delaware, Policies B61JWO, B61JTO. B60000 series: In Arkansas, Idaho, Oklahoma, Pennsylvania, Texas, & Virginia, Policies: ICC18B60C10, ICC18B60100, ICC18B60200, ICC18B60300, & ICC18B60400. Q60000 series: Whole: In Arkansas, Delaware & Oregon, Policy Q60100M. In Idaho Policy Q60100MID. In Oklahoma, Policy Q60100MOK. In Texas, Policy Q60100MTX.Q60000 series: Term: In Delaware, Policies Q60200CM. In Arkansas, Idaho, Oklahoma, Oregon, Texas, Policies ICC18Q60200C, ICC18Q60300C, ICC18Q60400C.
Final Expense insurance coverage is underwritten by Tier One Insurance Company. The life insurance policy described herein contains an optional Accelerated Death Benefits Rider that is intended for favorable tax treatment under Section 101(g) of the Internal Revenue Code. Aflac does not give legal or tax advice. Please consult with a qualified legal, tax, and accounting advisor before engaging in any transaction. In AR, AZ, ID, OK, OR, PA, TX and VA: Policies ICC21-AFLLBL21 and ICC21-AFLRPL21; and Riders ICC21-AFLABR22, ICC21-AFLADB22, and ICC21-AFLCDR22. Tier One Insurance Company is part of the Aflac family of insurers. In California, Tier One Insurance Company does business as Tier One Life Insurance Company (Tier One NAIC 92908).
This is a brief product overview only. Coverage may not be available in all states, including but not limited to DE, ID, NJ, NM, NY or VA. Benefits/premium rates may vary based on state and plan levels. Optional riders may be available at an additional cost. Policies and riders may also contain a waiting period. Refer to the exact policy and rider forms for benefit details, definitions, limitations and exclusions. For complete details, including availability and costs, please contact your local Aflac agent.
Aflac does not offer Universal or Variable Universal life insurance.
Content within this article is provided for general informational purposes and is not provided as tax, legal, health, or financial advice for any person or for any specific situation. Employers, employees, and other individuals should contact their own advisers about their situations. For complete details, including availability and costs of Aflac insurance, please contact your local Aflac agent.
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