Is life insurance taxable? What you should know
In general, you don’t need to worry about paying tax on a life insurance payout.1 Most beneficiaries receiving a death benefit do so income tax-free. However, there are some cases when taxes do apply to life insurance. In this article, we’ll tell you about:
Nine instances when life insurance is taxable
How to mitigate your life insurance tax liability
Frequently asked questions about life insurance and taxes
When is life insurance taxable?
Generally, beneficiaries can receive a lump sum death benefit from a life insurance policy without paying taxes on it. According to the Internal Revenue Service, if you receive proceeds from a life insurance contract after the death of the insured, you typically don’t need to include it in your gross income or owe federal income taxes on it.2
However, sometimes, depending on the policy, the benefit amount, the payment structure and other factors, life insurance can and does have tax implications. For instance, interest earned can be taxable, and amounts over certain federal exclusion limits may be taxable as well.
A tax advisor or financial professional can guide you, whether you’re trying to limit your own tax liability as a beneficiary or you’re looking to structure a policy to lower the tax burden for your beneficiaries. In addition, the IRS offers a tax tool that can help you determine whether life insurance proceeds are taxable; it takes about seven minutes to complete and is intended for U.S. citizens and resident aliens.
Nine instances where life insurance may be taxable
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 2025.3 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 to about $7 million per individual.4 A life insurance policy that is personally owned by the insured and exceeds that threshold would be taxable on the portion in excess of 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.5
2. The death benefit is paid as an annuity
Death benefits can be paid out as an annuity: In essence, the death benefit payment is the principle used to purchase an annuity, and that principle earns interest. So, as you (the beneficiary) receive these periodic payments, you 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
Borrowing against the cash value or otherwise extracting funds from a permanent policy (such as an insurance policy) could incur taxes if the loan or withdrawal amount exceeds the policy’s “basis” – the sum of all premiums paid to date.6 Note that unpaid or outstanding policy loan amounts will decrease the benefit payable to your beneficiary.
5. You surrender the policy
The cash surrender value of the policy 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.7 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.8 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.9
8. ‘Goodman Triangle’ arrangements
A Goodman Triangle is when the policyholder, insured, and beneficiary are three different people. In such an arrangement, 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.10 For policies that pay dividends, interest earned on those dividends may be considered taxable income.
Considerations to help mitigate tax liabilities
There 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, that may be set to a much lower amount in 2026). Transferring ownership of a life insurance policy before death can avoid owing federal estate taxes on it. You may wish to transfer ownership to an adult child, for example, or other trusted adult. If you, the insured, die within three years of such a transfer, the policy payout will still be included in your estate.11
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 202512, 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, and that includes any proceeds from a life insurance policy.
The above information is general in nature, and the specific tax implications of your situation could be very different. That’s why it’s essential to discuss your situation with your financial professional and/or tax advisor to best understand various circumstances and financial actions may affect your taxable estate, your taxable income, or that of your loved ones and beneficiaries.
Get help finding the right life insurance policy for your needs.
Frequently asked questions about life insurance and taxes
Is a life insurance payout taxable? Generally speaking, no. While there are some exceptions (especially for very high-value, complex estates), if you are the beneficiary of a life insurance death benefit, you typically do not have to pay income tax on the amount you receive.
In some instances, life insurance proceeds of $50,000 or more may be taxable. For example, when the payout is from a group life insurance policy through work, and premiums were paid by the employer, and those premiums are counted as pre-tax compensation, the payout is typically taxable. However, in the case of virtually all individual policies, life insurance premiums are paid for with after-tax dollars, and life insurance death benefits are paid out free of taxes to beneficiaries.