Is Life Insurance Taxed Federally?

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Whether or not life insurance is taxed federally depends entirely on a few key things. Find out if life insurance is taxed federally 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'm managing director and founder of Wealth Financial Partners and WFP Tax Partners in Basking Ridge, New Jersey. Today's topic is, is life insurance taxed federally? The answer to that question is a trick question, because when it comes to income proceeds, if I receive a death benefit from someone, I receive that benefit tax free. However, it's income tax free, but is still subject to estate taxes, federally. So, if the federal exemption, in this case in 2012 is five million and I inherit only a million, then it's below the five million threshold of estate tax. I do inherit it tax free. So, in that example it definitely is tax free, but every case is different. Come January 1st, we go back to a million dollars being the number for estate taxes. So, if I inherit two million dollars of death benefit federally income tax free, but it's still subject to federal taxes in January, increased to forty-five on a million dollars. So, the question is a trick question. Keep asking questions.

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