Insurance benefits are not considered taxable income. However, a tax is imposed on the transfer of a decedent’s “taxable estate.” This may also include the distribution of life insurance benefits to beneficiaries.
Mignon McLaughlin, an American journalist, and author said it best: “Philosophy teaches a man that he cannot take it with him; taxes teach him that he also cannot leave it behind.”
However, it is reassuring to know that life insurance payouts are not considered taxable income.
Typically, a beneficiary does not pay income tax on property received as a gift or inheritance. If a beneficiary later decides to sell the inherited property, he or she may be subject to capital gains or losses taxation.
To calculate the amount of tax liability, the recipient must know the value of the gifted or inherited property. The tax treatment of inherited or gifted property is different. It depends on whether the property was inherited or received as a gift during the donor’s lifetime.
Assigning the policy to another individual is one way to remove insurance from a taxable estate. However, it may still be subject to a gift tax. However, only the cash value of the policy and unearned and subsequent premiums paid by you are subject to tax. The face value of the policy is not taxable.
“This is very rare,” said Keith Diffenderffer, President of Endowment Income, LLC in Chula Vista, Calif. “It would probably require a contractual irrevocable beneficiary designation to be enforceable.”