How are Life Insurance Payouts Taxed?

Milford, NH Resident Looks for Advice

When money is paid from a life insurance policy upon death, the money is not considered taxable income and the beneficiary does not have to pay taxes.  If the money is not immediately paid out but is held by the insurance company for some reason, interest that is generated during that time may be subject to taxes.  If the insurance is paid to the estate, as opposed to a beneficiary, you may have to pay an estate tax on the money.

A Milford resident was taking out a life insurance policy to ensure that his family would be taken care of in the future.  Wanting to make sure he had a good understanding of the policy, he was seeking advice for how the money would be taxed.

Life Insurance Payouts Are Not Considered Taxable Income to the Beneficiary

When the death benefit on a life insurance policy is paid this money is not counted toward the beneficiary’s taxable income.  If the policy states the issuing company should hold on to the money for a set time after death, any interest accrued during this time will be considered taxable income for the beneficiary.

A common mistake that life insurance holders make is naming the policy to their estate, as opposed to a sole beneficiary.  In this scenario, the insurance payout is then subjected to any estate and inheritance taxes that may apply.  This can also affect the estate’s value, putting it over the limit that may require that these additional taxes be paid.

With this information, the Milford resident felt confident that his family would be well cared for after his death.  The policy stated his wife as beneficiary, payable immediately upon death.  This simple step ensures that the money paid will not be considered taxable income.