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Life insurance payouts aren’t usually taxable. But there are some exceptions you should be aware of if you have a policy or plan to purchase one. Let’s dive deeper into how beneficiaries and death benefits work, as well as when beneficiaries may need to pay taxes on life insurance.
A beneficiary is a person or entity that you can name in a life insurance policy to receive your death benefit upon your passing. You may choose one beneficiary or multiple beneficiaries, such as your spouse, adult children, a charity you believe in, a trust, or even a business. There are virtually no rules that restrict who you can pick. Additionally, you may change your beneficiary if you need to.1
The amount of money your insurance company will pay out to your beneficiaries if you pass away during your policy’s term is known as the death benefit. While the death benefit is typically paid out in a lump sum, your beneficiaries can choose other payment options. The amount they’ll receive depends on the face value of your policy minus any withdrawals from your cash value account or policy loans you didn’t repay.2
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In many cases, the money your beneficiaries receive from a life insurance payout is not taxed as income. However, there are a few exceptions that we’ll go over below.
Some common situations where beneficiaries might owe taxes on life insurance include:3
If life insurance proceeds have accumulated some interest, taxes are usually due. Fortunately, the amount that earned interest will be taxed, rather than the entire death benefit.
In the event a policyholder chose their estate as a life insurance beneficiary, taxes might apply. The taxes loved ones may pay depend on the estate’s value.
The person that buys a life insurance policy is usually considered the owner and insured. But if a different person holds each role, there may be taxes involved.
Fortunately, there are some strategies beneficiaries can use to avoid paying taxes on a life insurance payout, such as:3
When an estate is involved, whether life insurance proceeds are taxable is based on the policy’s ownership when the insured passes away. To avoid taxation, you can transfer ownership of your policy to another person or entity.
If you set up an irrevocable life insurance trust (ILIT), it will own the life insurance policy rather than you. This means the proceeds will not be included in your estate. You can state how you’d like the beneficiaries to receive or use the payout.
A gift tax comes into play if the life insurance policy’s cash value is higher than the gift tax exemption, which is $12.92 million or $17,000 per year as of 2023.3 It’s a good idea to ensure your cash value does not exceed this amount.
A death benefit can protect your loved ones financially upon your passing. The good news is that it’s not taxable in many cases. However, there are several exceptions you should know about and keep in mind when you set up your policy.
Aflac offers a variety of term and whole life insurance plans that can help you meet your goals. Our plans offer a variety of coverage options. Chat with an agent today to get a quote or more information.
1 Insurance Information Institute - What is a Beneficiary? https://www.iii.org/article/whatbeneficiary. Accessed August 28, 2024.
2 Investopedia - What Is the Face Value of a Life Insurance Policy? Updated September 06, 2023. https://www.investopedia.com/ask/answers/013015/how-do-i-determine-face-value-life-insurance-policy.asp. Accessed August 28, 2024.
3 U.S. News - Do Beneficiaries Pay Taxes on Life Insurance? Updated May 31, 2024. https://www.usnews.com/insurance/life-insurance/do-beneficiaries-pay-taxes-life-insurance. Accessed September 19, 2024.
Content within this article is provided for general informational purposes and is not provided as tax, legal, health, or financial advice for any person or for any specific situation. Employers, employees, and other individuals should contact their own advisers about their situations. For complete details, including availability and costs of Aflac insurance, please contact your local Aflac agent.
Aflac coverage is underwritten by American Family Life Assurance Company of Columbus. In New York, Aflac coverage is underwritten by American Family Life Assurance Company of New York.
Aflac life plans - 68000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC1368100, ICC1368200, ICC1368300, ICC1368400. In Delaware, Policies A68100-A68400. 65000 series: In Virginia, Policies ICC0965JTO & ICC0965JWO. B61000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC18B61JWO & ICC18B61JTO. In Delaware, Policies B61JWO, B61JTO. B60000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC18B60C10, ICC18B60100, ICC18B60200, ICC18B60300, & ICC18B60400. Q60000 series/Whole: In Arkansas & Delaware, Policy Q60100M. In Idaho, Policy Q60100MID. In Oklahoma, Policy Q60100MOK. Not available in Virginia. Q60000 series/Term: In Delaware, Policies Q60200CM. In Arkansas, Idaho, Oklahoma, Policies ICC18Q60200C, ICC18Q60300C, ICC18Q60400C. Not available in Virginia.
Coverage may not be available in all states, including but not limited to DE, ID, NJ, NM, NY or VA. Benefits/premium rates may vary based on state and plan levels. Optional riders may be available at an additional cost. Policies and riders may also contain a waiting period. Refer to the exact policy and rider forms for benefit details, definitions, limitations, and exclusions.
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