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When beneficiaries receive a payout from a life insurance policy, they typically don't have to pay taxes. However, there are a few situations where a portion of the life insurance benefit is ...
For example, if the decedent died on Feb. 1 but the proceeds weren’t paid to the beneficiary until March 1, the life insurance company pays the beneficiary the proceeds plus one month’s worth ...
Ordinarily, life insurance contracts offer tax-free death benefits to beneficiaries. Cash value policies can also offer tax-free growth. Cash value policies can also offer tax-free growth.
Life insurance proceeds are generally included in the gross estate if the benefits are payable to the estate, or if the decedent was the owner of the life insurance policy or had any "incidents of ownership" over the life insurance policy (such as the power to change the beneficiary designation).
However, using insurance proceeds to pay the insured's estate taxes effectively increases the beneficiary's estate since the beneficiary will not have to sell inherited assets to pay such taxes. The solution to both drawbacks is usually an irrevocable life insurance trust.
No, beneficiaries generally do not pay taxes on payouts from term, whole or universal life insurance policies. There are some cases, though, in which the benefit proceeds are taxable.
Life insurance (or life assurance, especially in the Commonwealth of Nations) is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of an insured person.
A Reddit thread recently highlighted some confusion about the difference between an estate executor and a life insurance beneficiary and when a life insurance claim can be made. “Parent passed away.