Are life insurance death benefits taxable?

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Well, it all depends.

In most instances, the death benefits from a life insurance policy are not subject to federal income taxes. This means that the payout (the proceeds that are paid out under individual life insurance policies or group life insurance plans) are not included in your beneficiary's gross income and do not need to be reported to the IRS.

In certain cases, however, the beneficiary of a life insurance policy may opt to receive the death benefit in a form other than a lump sum. For example, if the beneficiary chooses to keep the proceeds invested with the insurance company and receive regular installments over time, any interest that he or she receives on those funds will be taxed and must be reported as such.

It is also important to note that while life insurance death benefits are typically not attributed as taxable income to the policy’s beneficiary, the proceeds can be included in the policy owner's estate for estate tax purposes. This taxation may be avoided, however, if the owner of the policy is someone other than the insured.

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