Do You Pay Taxes on Life Insurance?

Aflac offers life insurance policies that can be useful tools in your financial planning. A death benefit can help beneficiaries cover end-of-life expenses, pay off debts, or even serve as an inheritance. In most cases, beneficiaries do not have to pay taxes on life insurance proceeds.¹ However, that’s not always the case. Read on to learn how life insurance payouts work, when you may have to pay taxes on life insurance, and which expenses are tax deductible.

5 Min Read

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Key Takeaways

Depending on your state and the cash value of the policy, beneficiaries may have to pay taxes on life insurance payouts.
Working with a tax professional can help you avoid costly tax mistakes with your life insurance policy and potentially take advantage of available tax deductions.
Aflac offers term life and whole life insurance policies that can provide financial protection for beneficiaries after you pass.

How is life insurance taxed?

There are certain instances when a life insurance payout is taxable. Life insurance benefits may be subject to one or multiple of the following tax types:

Estate Tax: An estate tax is a tax on your right to transfer property upon your death. Your life insurance proceeds may be taxable if your estate is worth more than the maximum threshold allowed.
Inheritance Tax: An inheritance tax is a tax placed upon the recipient for any inherited cash payouts, properties, and other assets. Iowa, Kentucky, Nebraska, New Jersey, Maryland, and Pennsylvania are currently the only states that enforce this tax.¹
Generation-Skipping Tax: Similarly to the estate tax, the generation-skipping tax is imposed on any assets that skip a generation. They are only enforced when they exceed the same threshold.²

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When is life insurance taxable?

There are certain cases when you have to pay taxes on life insurance. Each state has its own set of guidelines regarding taxes on life insurance policies. Most notably, if the cash value of the policy exceeds a certain amount you may encounter the estate tax or the generation-skipping tax. Some other instances include:

There are more than two parties involved

A life insurance policy has a policy owner, an insured person, and at least one beneficiary.³ Usually, the policy owner and the insured person are one and the same. When that’s the case, the policy is not taxable.

However, if a third person is involved, the beneficiary on the life insurance policy may be taxed. For example, say a mother buys her daughter a life insurance policy but names the father the beneficiary. In this instance, the father would be taxed.

You withdraw from the policy’s cash value

Some permanent life insurance policies may have cash value. With these policies, your premium pays for your coverage, and anything additional you pay is invested in an account that accrues value over time. Some policies allow you to access this money during your life through a loan or a partial withdrawal.

If you take out a loan against the cash value, you will have to make interest payments, and your death benefit may shrink over time. If you opt for a partial withdrawal, you may have to surrender the policy to use the money freely. If not, that amount may be subtracted from your final life insurance payout. You shouldn’t pay taxes on life insurance cash outs that are less than what you have paid into your premium.⁴

You sell the policy

You have the option to sell your life insurance policy for cash.⁵ However, the broker that facilitates this sale usually takes a portion of the selling price. If the profits are worth more than what you have paid so far, this life insurance payout can qualify for income taxation.⁶

Viatical Settlements for the terminally ill can escape this tax. A viatical settlement can allow you to invest in and purchase a life insurance policy that is worth less than the death benefit. It usually falls back on how much the policy is being sold for compared to how much has been paid into it.

You surrender a policy

When surrendering a life insurance policy, you may face surrendering fees. After surrendering, you will usually have to pay taxes on the life insurance cash value because it now falls under the qualifications to be taxable income.

Your policy goes into a taxable estate

If the beneficiary isn’t named in your policy, your life insurance benefits usually will go into a taxable estate. As of 2025, the first $13.9 million is not taxed at a federal level, but anything above this amount is subject to taxation. State regulations may have a lower chance of exemption and vary depending on location.

How to avoid paying unnecessary taxes on life insurance

To avoid paying unnecessary taxes on life insurance, we recommend you choose your beneficiaries wisely. Making the beneficiary “payable to my estate” is typically one of the most common mistakes. This can raise the value of the estate above the threshold, making taxes more likely. If you name a person, there is a less likely chance of being taxed.

We recommend you consult with a tax professional to help you access your tax liability. However, one of the main ways to remain protected is to name the beneficiary as an irrevocable life insurance trust. This helps keep the cash value from being lumped into the estate value. In this case, the value of the life insurance policy can be distributed amongst any beneficiaries listed in the trust. This option may shield beneficiaries from being required to pay taxes on life insurance proceeds.

Is life insurance tax deductible?

Typically, life insurance premiums are considered a personal expense. Because of this, life insurance premiums are not tax deductible. However, there are a variety of tax benefits to having life insurance.

There are deductions if you are a business owner, and you have business-paid premiums. Also, the tax deferred cash growth of the policy is not subject to taxing through government regulation either.

This means the cash value of your life insurance plan cannot be taxed while it is growing. This allows you to collect higher interest rates and avoid money being taken out.⁷

Manage your life insurance policy with Aflac

Although life insurance proceeds typically aren’t taxable, there are a few instances where beneficiaries will have to pay taxes. If you’re curious about how to protect your life insurance policy from being taxed, we advise you to speak to a local tax professional. Aflac offers term life and whole life insurance policies that can support your family’s financial planning. Chat with an Aflac agent to learn more and get a quote today.

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