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We care about Aflac’s policyholders affected by the recent weather:

To help provide relief for California policyholders residing in Santa Cruz County who were affected by the coastal storms, Aflac will provide a premium grace period starting Dec. 23, 2024, and ending Apr. 15, 2025. This grace period also provides an extension of filing deadlines for claims and leniency for any other action required under the policy. Aflac will provide a replacement copy of the policy upon request by the policyholder.

For Network Dental and Vision Members:

This grace period also provides an extension of filing deadlines for claims; relaxation of prior authorization, precertification, and referral requirements; access to appropriate out-of-network providers due to unavailability on in-network providers or the members’ displacement; and leniency for any other action required under the certificate. A replacement copy of the certificate will be provided upon request by the certificate holder. Affected members should contact Aflac Benefit Solutions (formerly Argus Dental and Vision) at 855-819-1873, Option 1, for assistance.

We care about Aflac’s policyholders affected by the recent wildfires:

To help provide relief for California policyholders residing in Los Angeles and Ventura Counties affected by the wildfires, Aflac will provide a premium grace period starting Jan. 7, 2025, and ending Mar. 10, 2025. This grace period also provides an extension of filing deadlines for claims and leniency for any other action required under the policy. Aflac will provide a replacement copy of the policy upon request by the policyholder.

For Network Dental and Vision Members:

This grace period also provides an extension of filing deadlines for claims; relaxation of prior authorization, precertification, and referral requirements; access to appropriate out-of-network providers due to unavailability on in-network providers or the members’ displacement; and leniency for any other action required under the certificate. A replacement copy of the certificate will be provided upon request by the certificate holder. Affected members should contact Aflac Benefit Solutions (formerly Argus Dental and Vision) at 855-819-1873, Option 1, for assistance.

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Are Life Insurance Proceeds Taxable?

At Aflac, we issue thousands of life insurance policies every year. We're familiar with many common questions about life insurance, including how life insurance premiums and payouts work with taxes. In most cases, beneficiaries do not have to pay taxes on life insurance proceeds.1 However, we advise you to speak with a tax professional to ensure that all your bases are covered.

There are some instances where the beneficiary can be taxed. Most commonly, the cash value of life insurance is taxable when the inheritance is a particularly large sum. Read on to learn how life insurance payouts work, when you may have to pay taxes on life insurance, and which expenses are tax deductible.

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How life insurance payouts work

A life insurance policy can help ensure your loved ones receive financial protection. If you pass away, beneficiaries will receive a payout that they can use to pay off debts, cover everyday expenses, and pay for other necessary costs.

What can beneficiaries use life insurance proceeds for?

Beneficiaries can use the proceeds they receive from your life insurance policy to help cover any expenses. It’s important to assess your financial needs to figure out how to make the most of the funds. Here are some examples of ways loved ones can use the payout:

  • Pay off debt: If you have debt from a mortgage, credit cards, or student loans, loved ones can use the payout to help repay and eliminate these debts.

  • Pay for the policyholder’s funeral: The life insurance payout can help beneficiaries cover your funeral, burial costs, and other final expenses after your passing.

  • Cover essential expenses: From groceries and gas to monthly bills, your beneficiaries can use the proceeds they receive from your life insurance plan to help cover necessary everyday costs.

  • Build an emergency fund: Loved ones can create an emergency fund with the proceeds from your life insurance policy. An emergency fund can help provide a financial safety net in case of unforeseen costs and situations, such as medical bills and unemployment.

Life Insurance Tax Types

There are certain instances when your life insurance payout is taxable. To help protect your payout, below is a list of different life insurance tax types:

  • Estate Tax: An estate tax is a tax on your right to transfer property upon your death. Your life insurance proceeds may be taxable if your estate is worth more than the maximum threshold allowed.
  • Inheritance Tax: The inheritance tax is a tax placed upon the recipient for any inherited cash payouts, properties, and other assets. Iowa, Kentucky, Nebraska, New Jersey, Maryland, and Pennsylvania are currently the only states that enforce this tax.
  • Income tax: An income tax is collected by the government for any money earned by citizens throughout the year. Typically, life insurance proceeds are not considered taxable income.1
  • Generation-Skipping Tax: Similarly to the estate tax, the generation-skipping tax is imposed on any assets that skip a generation. They are only enforced when they exceed the same threshold.2
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When is life insurance taxable?

There are certain cases when you have to pay taxes on life insurance. Most notably, if the cash value of the policy exceeds a certain amount you may encounter the estate tax or the generation-skipping tax. The inheritance tax may come into play if you live in one the six states that enforce this measure. Each state has its own set of guidelines regarding taxes on life insurance policies.

When There Are More Than Two Parties Involved

The main parties involved in determining if your life insurance premium is taxable are the policy owner, the beneficiary, and the insured person.3 Usually, the policy owner and the insured person are one and the same. If this is the case, the policy is not taxable.

However, if a third person is involved, the beneficiary on the life insurance policy may be taxed. For example, say a mother buys her daughter a life insurance policy but names the father the beneficiary. In this instance, the father would be taxed.

When You Withdraw Money from a Cash Value Life Insurance Policy

When you invest in a cash value life insurance policy, part of your premium helps support your loved ones and part is invested into an account to help provide financial support. You pay into it throughout your lifetime. To access this money early, you can take out a loan or a partial withdrawal.

If you take out a loan against the cash value, you can be subjected to interest payments and your benefits may shrink over time. If you opt for a partial withdrawal, you may have to surrender the policy to use the money freely. If not, that amount may be subtracted from your final life insurance payout. You shouldn’t pay taxes on life insurance cash outs that are less than what you have paid into your premium.4

When You Sell a Life Insurance Policy

You can sell your life insurance policy for cash.5 However, the broker that facilitates this sale usually takes a portion of the selling price. If the profits are worth more than what you have paid so far, this life insurance payout can qualify for income taxing.6

Viatical Settlements for the terminally ill can escape this tax. A viatical settlement can allow you to invest in and purchase a life insurance policy that is worth less than the death benefit. It usually falls back on how much the policy is being sold for compared to how much has been paid into it.

When You Surrender a Life Insurance Policy

When surrendering a life insurance policy, you may face surrendering fees. You will usually have to pay taxes on the life insurance cash value because it now falls under the qualifications to be taxable income.

When Your Life Insurance Policy Goes into a Taxable Estate

If the beneficiary isn’t named in your policy, your life insurance benefits usually will go into a taxable estate. As of 2025, the first $13.9 million is not taxed at a federal level – this is the threshold. Anything above this amount is subject to being taxed. State regulations can have a lower chance of exemption and vary depending on location.

How to Avoid Paying Unnecessary Taxes on Life Insurance

To avoid paying unnecessary taxes on life insurance, we recommend you choose your beneficiaries wisely. Making the beneficiary “payable to my estate” is typically one of the most common mistakes. This can raise the value of the estate above the threshold, making taxes more likely. If you name a person, there is a less likely chance of being taxed.

We recommend you consult with a tax professional to help you access your tax liability. However, one of the main ways to remain protected is to name the beneficiary as an irrevocable life insurance trust. This helps keep the cash value from being lumped into the estate value. In this case, the value of the life insurance policy can be distributed amongst any beneficiaries listed in the trust. This option may shield beneficiaries from being required to pay taxes on life insurance proceeds.

Is Life Insurance Tax Deductible?

Typically, life insurance premiums are considered a personal expense. Because of this, life insurance premiums are not tax deductible. However, there are a variety of tax benefits to having life insurance.

There are deductions if you are a business owner, and you have business-paid premiums. Also, the tax deferred cash growth of the policy is not subject to taxing through government regulation either.

This means the cash value of your life insurance plan cannot be taxed while it is growing. This allows you to collect higher interest rates and avoid money being taken out.7

Aflac Can Help Answer Your Tax on Life Insurance Payout Questions

Although life insurance proceeds typically aren’t taxable, there are a few instances where beneficiaries will have to pay taxes. If you’re curious on how to protect your life insurance policy from being taxed, we advise you to speak to a local tax professional. Those interested in getting a life insurance policy can start chatting with an Aflac agent and get a quote today.

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