Jane Dotson
Life insurance benefits are typically not taxed, but there are some circumstances when a payout can be taxable. For example, if the beneficiary isn't named in your policy, the benefits will usually go into a taxable estate. This can also happen if the payout is received in instalments.
| Characteristics | Values |
|---|---|
| Estate Tax | 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. As of 2025, the first $13.9 million is not taxed at a federal level. |
| Inheritance Tax | 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. |
| Income Tax | Collected by the government for any money earned by citizens throughout the year. |
| Taxable Estate | If the beneficiary isn't named in your policy, your life insurance benefits will usually go into a taxable estate. |
| Taxable Payouts | In general, the payout from a term, whole, or universal life insurance policy isn't considered part of the beneficiary's gross income. However, there are some cases when a death benefit can be taxed, including receiving it in installments. |
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Estate tax
Life insurance benefits are typically not taxed, but there are some circumstances in which a payout can expose you to tax liability. One of these is estate tax, which is a tax on your right to transfer property upon your death. If the beneficiary isn't named in your policy, your life insurance benefits will usually 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 being taxed. State regulations can have a lower threshold for exemption and vary depending on location. To avoid paying unnecessary taxes on life insurance, it is recommended that you choose your beneficiaries wisely. Making the beneficiary "payable to my estate" is typically one of the most common mistakes, as this can raise the value of the estate above the threshold, making taxes more likely.
In general, the payout from a term, whole, or universal life insurance policy isn't considered part of the beneficiary's gross income, so it isn't subject to income or estate taxes. However, there are some cases when a death benefit can be taxed. For example, if you receive the payout in installments, this can expose you to tax liability. Additionally, any funds over your policy's cash basis will be taxed as regular income.
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Inheritance tax
Life insurance benefits are typically not taxed. However, there are some circumstances in which a payout can expose you to tax liability.
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 – this is the threshold. Anything above this amount is subject to being taxed. State regulations can have a lower chance of exemption and vary depending on location.
To avoid paying unnecessary taxes on life insurance, 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.
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Income tax
Life insurance benefits are typically not taxed. However, there are some circumstances when a payout can expose you to tax liability. For example, if the beneficiary isn't named in your policy, the benefits will usually 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 being taxed. State regulations can have a lower threshold for exemption and vary depending on location.
If you receive the payout in instalments, this can also make it taxable. However, in general, the payout from a term, whole, or universal life insurance policy isn't considered part of the beneficiary's gross income and so isn't subject to income tax.
The amount you paid into your policy (the cash basis) that you get back when surrendering your policy is considered a tax-free return of your principal. But any funds over your policy's cash basis will be taxed as regular income.
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Tax liability
Life insurance benefits are typically not taxed, but there are some circumstances in which a payout can expose you to tax liability. For example, if the beneficiary isn't named in your policy, the benefits will usually 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 tax. State regulations can vary, with some states enforcing an inheritance tax.
If you receive the payout in instalments, this can also expose you to tax liability. However, the amount you paid into your policy (the cash basis) that you get back when surrendering your policy is considered a tax-free return of your principal. Any funds over your policy's cash basis will be taxed as regular income.
In general, the payout from a term, whole, or universal life insurance policy isn't considered part of the beneficiary's gross income and isn't subject to income or estate taxes. However, there are some cases when a death benefit can be taxed. For example, if the payout raises the value of the estate above the threshold, it may be subject to tax.
To avoid paying unnecessary taxes on life insurance, it's important to choose your beneficiaries wisely. Making the beneficiary "payable to my estate" can raise the value of the estate and make taxes more likely.
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Tax-free return of your principal
Life insurance benefits are typically not taxed. However, there are some circumstances in which a payout can expose you to tax liability. For example, if the beneficiary isn't named in your policy, the benefits will usually 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 being taxed. State regulations can vary, and some states have a lower chance of exemption.
If you receive the payout in instalments, this can also expose you to tax liability.
In general, the payout from a term, whole, or universal life insurance policy isn't considered part of the beneficiary's gross income. This means it isn't subject to income or estate taxes. However, there are some cases when a death benefit can be taxed. For example, Iowa, Kentucky, Nebraska, New Jersey, Maryland, and Pennsylvania are currently the only states that enforce an inheritance tax.
Typically, the amount you paid into your policy (the cash basis) that you get back when surrendering your policy is considered a tax-free return of your principal. However, any funds over your policy's cash basis will be taxed as regular income.
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Frequently asked questions
Typically, life insurance benefits are not taxed. However, there are some circumstances when a payout can expose you to tax liability, including receiving it in instalments.
Estate tax, inheritance tax, and income tax.
As of 2025, the first $13.9 million is not taxed at a federal level. Anything above this amount is subject to being taxed.
