Are Life Insurance Proceeds Taxable? What You Should Know
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One key financial advantage of life insurance is that, in most cases, the death benefit is income tax-free, and your beneficiary won’t owe anything to the IRS.1
However, there are situations when a death benefit or other proceeds from life insurance will be considered taxable income. Here you’ll learn:
Which life insurance proceeds will be tax-free?
Situations when proceeds are likely to be taxable.
Tax treatment of different types of proceeds.
When are life insurance proceeds tax-free?
In the following circumstances, proceeds will be tax-free:
Standard life insurance payouts to beneficiaries: If you pass and your beneficiary receives a lump sum death benefit from a standard policy, they'll receive the full payout and won't owe taxes. That's a simple, standard payout.2
Employer-provided group life insurance payouts under $50,000: The IRS allows for a $50,000 exemption for employer-provided group life insurance payouts; after that, the payout may be taxed.
Situations where there are no tax implications: There are some situations that result in tax implications. We’ll discuss these below. If you have questions, you should consult with a financial professional to help you determine if you or your beneficiaries will owe taxes on life insurance proceeds.
Tax implications of different types of life insurance
There are different types of life insurance, each of which has unique tax implications to consider.
Standard term life insurance payouts are typically not taxable.
Whole life insurance death benefits are income tax free, but these policies have a cash value component. Cash withdrawals or surrenders may be taxed.3,4
Group term life insurance payouts can be taxed when they exceed the first $50,000 exemption; any balance over $50,000 will be taxed.
Here’s a quick breakdown:
Type of Life Insurance | Are Proceeds Taxable? |
|---|---|
Standard Term Life Insurance | Death benefit not taxable |
Whole Life Insurance | Death benefit not taxable; cash withdrawals or surrenders may be taxed |
Group Term Life Insurance | Taxable only when the death benefit exceeds $50,000 |
When are life insurance proceeds taxable?
While the death benefits of life insurance policies are usually income tax-free, there are certain circumstances when policyholders or beneficiaries pay taxes, including the following.
1. The policy exceeds estate tax exemption limits
Life insurance may be taxable when it exceeds federal estate tax limits, which is set at $13.99 million for 2025.5 However, it’s important to point out that this limit “sunsets” at the end of 2026, and absent action by Congress, the exemption threshold will be reduced.
A life insurance policy that is personally owned by the insured and exceeds that threshold would be taxable on the portion that exceeds the estate tax limit. And while they are paid by your estate — not your heirs — estate taxes reduce the amount your heirs receive.
It is generally more advisable to declare a person or a trust as your beneficiary rather than your estate, and any "incidents of ownership in the policy may result in the death proceeds being included as part of your taxable estate for estate tax purposes.6
If you’re choosing a policy as a way to transfer wealth, this is an important estate planning consideration to keep in mind.
2. The death benefit is paid as an annuity
The death benefit can be paid out as an annuity. In essence, the death benefit payment is the principal used to purchase an annuity, and that principal earns interest. So, as the beneficiary receives these periodic payments, they may owe tax on the interest portion.
3. The death benefit is paid in installments
Similarly, if you elect to receive payments in installments rather than a lump sum payment, interest may be earned that could be subject to income tax.
4. You withdraw or borrow against the cash value
Withdrawing funds from a permanent policy (such as an insurance policy) could incur taxes if the withdrawal amount exceeds the policy’s “basis” — the sum of all life insurance premiums paid to date.7 Loans are treated differently. Even if the amount of the loan exceeds the policy’s basis, it will not incur a tax unless the policy is eventually surrendered or lapses — in which cases the amount over basis would then be realized.
Note that unpaid or outstanding policy loan amounts will decrease the benefit payable to your beneficiary.
5. You surrender the policy
The policy's cash surrender value is the amount you receive when you surrender — i.e., cash in — a permanent whole or universal life insurance policy (less any applicable fees). If the cash surrender value is greater than the premiums you paid, the excess will be considered taxable.
6. It’s an employer-paid group plan
Employer-paid group plans that pay out a death benefit of more than $50,000 may be subject to taxes.8 Note that for some small businesses offering group term life, the premiums (if paid by the business) may be tax-deductible.
7. There are certain riders on the policy
Policy riders provide added benefits that are not typically taxable.9 However, in certain instances, those riders provide accelerated benefit payments, which may be taxable if received on a per diem basis or exceed tax exclusions.10
8. ‘Goodman Triangle’ arrangements
A Goodman Triangle is when the policy owner, insured person and beneficiary are three different people.11
When this happens, life insurance benefits may be considered a taxable gift if the death benefit exceeds the federal gift limit (annual or lifetime). This issue can generally be avoided by having the insured and the policyholder be the same person.
9. You've earned interest on the dividends
Whole life insurance policies from mutual insurance companies (such as Guardian) can pay out dividends to policyholders depending on the financial performance of the company. If the policy pays dividends and the policyholder chooses the dividend option to accumulate interest, interest earned on those dividends may be considered taxable income.12
Tax forms and reporting requirements
There are a few key things to keep in mind when it comes to tax forms and reporting requirements around life insurance proceeds.
According to the IRS, you do not have to report life insurance proceeds that you receive as a beneficiary as long as they’re not considered taxable income.13
However, there are circumstances when you need to report income to the IRS. You may receive a 1099-INT or a 1099-R.
A 1099-INT is used to report interest paid. If a policy paid you interest on your death benefit, for example, you may receive this form and are required to report it to the IRS.14
A 1099-R will report distributions from pensions, annuities, insurance contracts, and more. You may receive this if you’ve taken your insurance payout as an annuity or if you received your payout in installments.15
If you’re unsure whether you have to report life insurance proceeds to the IRS, it’s better to be safe than sorry. Speak to a financial professional who can help you determine what you need to report and, if you do need to report income, how much you may owe.
Considerations to help mitigate tax liabilities
Here are some things to keep in mind – and discuss with your financial professional or tax advisor — when tax planning around life insurance.
Ownership transfer
Transferring ownership of a life insurance policy can be one strategy for those concerned about estate taxes (again, keeping in mind that while the lifetime exclusion for estate taxes is $13.99 million in 2025, this limit can change annually).16
Transferring ownership of a life insurance policy before death can help your heirs avoid owing federal estate taxes. You may wish to transfer ownership to an adult child, for example, or another trusted adult. If you, the insured, die within three years of such a transfer, the policy payout will still be included in your estate.17
Irrevocable life insurance trust
Another method for protecting a life insurance policy is by creating an irrevocable life insurance trust (ILIT) and then transferring the policy ownership to that trust. Again, as the name implies, this is an irrevocable action, and you will no longer have ownership or control over the policy after you transfer it to the trust. That means you can’t change beneficiaries or even cancel the policy once it is in the trust.
Gift taxes
The annual gift tax exclusion is $19,000 for 2025, and gifts to any individual over that threshold are counted toward the $13.99 million lifetime estate tax exemption. So, if the policy's "fair market value" exceeds the annual gift tax exclusion, there are added tax implications to consider.
Your spouse as beneficiary
Assets left to your spouse after you die are not typically subject to estate taxes, including any proceeds from a life insurance policy. This is a valuable consideration for many.
Please note. The preceding information is general in nature, and the specific tax and estate planning implications for your situation could be very different. That’s why it’s essential to discuss your situation with a financial or tax professional who understands how various actions may affect your taxable estate and taxable gross income, or that of your beneficiaries.
Guardian can help
A Guardian financial professional can provide answers on the many tax issues and considerations surrounding life insurance. Whether you’re already a policy owner or are thinking about purchasing new term, whole or universal coverage, there's someone in your area who can help.