Most of the time, life insurance death benefit proceeds are not taxable as income. There are some exceptions to this rule. Some life insurance policies give the beneficiary the option of receiving monthly payments for life (like an annuity) rather than a lump sum. In this case the interest received above the initial benefit amount is taxable as income.
In the case of large estate plans it is important to consider that life insurance death benefits are considered part of the estate if the deceased is the owner of the policy within three years of their death. Estate taxes are currently levied on estates valued higher than $5.25 million1. One way to ensure that heirs are able to pay estate taxes is by setting up an irrevocable life insurance trust. Irrevocable life insurance trusts are complex and it is extremely important to make sure they are set up correctly. At Montana Life Group we recommend a team approach to estate planning. We have relationships with CPAs and Estate Planning Attorneys, allowing us to provide our clients access to the expertise needed for this type of complex planning.
- Current as of 5/30/13, ref. American Taxpayer Relief Act Rev. Proc. 2013-15 http://www.irs.gov/pub/irs-
drop/rp-13-15.pdf
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