Which Policy Benefits are Not Taxable?

Privately owned life insurance policies where premiums are paid by individuals are not considered taxable income. The face value, along with the cash value that builds in permanent life policies such as universal and whole life, are received by the beneficiary tax free.

Which Policy Benefits Are Taxable?

Group life insurance plans, where premiums are paid (in total or partially) by a sponsor such as an employer or organization, can be subject to taxation. Benefit amounts of group policies that are in excess of $50,000 (or dependent and spousal coverage under group life plans valued over $2,000) are considered taxable compensation by the IRS.

Estate Tax

The benefit amount of a life insurance plan can count toward the value of a policyholder's estate. If the property is worth more than the federal estate exemption limit, an estate tax will be levied against it.

Avoiding Estate Taxes

Policy owners can circumvent estate taxes on their life insurance policy by assigning ownership to another person, such as an adult child. Also, their estate must not be the designated beneficiary on their life insurance policy.

Warning

In 2009, estates will be taxed at 45 percent if the value is over $3.5 million, according to the IRS. Also the transference of policy ownership to avoid estate taxes must be done at least three years before the death of the policy holder.

Source:

Pacific Life: Maximizing Life Insurance Benefits

New York Life

Payroll-taxes.com: Calculating the Value of Group Term Life Insurance

More Information:

Internal Revenue Service