Tax Treatment of Life Insurance Proceeds

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Life insurance death benefits are income tax free to the beneficiaries of a policy. Learn more about the tax treatment of life insurance proceeds with help from a personal finance expert and professional in this free video clip.

Part of the Video Series: Personal Finance & Life Insurance
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Video Transcript

Hi, this is Walter Pardo. I am managing director and founder of Wealth Financial Partners and WFP Tax Partners in Basking Ridge, New Jersey. Today, we're going to talk about tax treatment of life insurance proceeds. Life insurance death benefits are income tax free to the beneficiaries of a policy. However it does not exempt the individual passing away from including it in his estate. The estate sometimes has to put in there the life insurance proceeds, which could be subject to an inheritance tax or the federal inheritance or state tax. So therefore it's a trick question because if you inherit money from a life insurance policy, what ends up happening is that you inherit it after the estate gets paid. So if there is money owed by the estate, it could be 45 percent, it could be 15 percent owed for the estate, after that gets paid then you get paid. So if you have no issues with the inheritance or the estate tax then yes it is exempt from taxes to you. Another possible scenario is if the individual was deducting the premium for tax purposes, if I was paying $1000 but I was deducting it and I die, my heirs would not be able to use the tax exemption in most cases. So there are a lot of questions and it is a trick question but the answer is ask more questions.


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