Do I have to pay taxes on life insurance?
The answer is—it depends. Many people ask about life insurance and taxes. Let’s answer a few of the most common questions asked about taxes and life insurance.
No taxes for most life insurance beneficiaries
Your life insurance beneficiaries do not pay taxes on any death benefits in most situations when insurance is bought to meet personal and not business needs. This is one of the reasons why life insurance is often part of a financial security plan. Other tax considerations can arise when someone gifts the premium to insure another person. These events are not common, but they should be considered when life insurance is used for gifting.
Interest as taxable income
Any interest paid at claim time in addition to the death benefit that you receive starts as income that may be taxable. You should report it on your federal tax return as interest received. But, different tax rules may apply if the benefits pay in installments instead of a lump sum payout. The default payout option for most life insurance policies is a lump sum check. Insurance companies typically payout benefits within 30-days of receiving a certified death certificate.
Insurance premiums are not typically tax deductible
Generally speaking, you pay your life insurance premiums with after-tax dollars. So, you can't deduct life insurance premiums because it's considered a personal expense.