Under the normal rules life insurance death benefits that beneficiaries receive in a lump sum payment are not taxed. “This tax-free exclusion also covers death benefits payment made under endowment contracts, worker’s compensation insurance contracts, employer’s group plans or accident and health insurance contracts.” This exclusion from taxes does not apply if the “policy is combined with a non-refund life annuity contract where a single premium is equal to the face value of the insurance is paid.” While the beneficiary typically does not have to pay income taxes on life insurance death benefits, the policy can still be included as part of the estate of the deceased if the person who passed away was an owner of the policy when they died. This means that estate taxes could apply if the threshold is met.
See Steven Merkel, How are life insurance proceeds taxed?, Investopedia, March 12, 2016.
Special thanks to Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.
