Tax Treatment of Life Insurance Death Benefits

What is the tax treatment of life insurance death benefit proceeds?

Life insurance death benefit proceeds are generally not subject to income taxation provided they are paid in a lump sum; however, there a few exceptions to this rule. If a settlement option is used other than the lump sum option, then the interest earned on the principal death benefit is taxable.

Although life insurance proceeds are generally exempt from income taxation, they are subject to estate and inheritance taxes. For more information on estate and inheritance taxes visit the estate planning section.