Are life insurance proceeds taxable

[ej401]

John is owner and beneficiary of life insurance policy on Jane. Does John report the proceeds as income, hence taxable?

Thanks.

[andi9899]

No! Life insurance prceeds are not taxable.

[mwcpa]

In most cases, the life insurance portion of the payout referred to above as the result of the passing of the insured are tax free.

If the policy is paid out (canceled) prior to the passing of the insured there may be a component of taxable income with any payment to the owner by the insurance company.

[ej401]

Thanks MW.


If the insured is the owner of the policy, is it probatable asset on the insured's estate?

[mwcpa]

If the beneficiary is specificly stated it should not be subject to probate, but it is included in the estate tax filing of the owner.

[ej401]

Hello again MW,

May I please clarify my question so that I can understand better.  Insured is not the policy owner - John owns policy, insured is wife Jane, and John is beneficiary.

The proceeds are not probatable but are they included in insured's  (wife jane) estate tax filing?

Thanks again.

[mwcpa]

If John owns a life insurance policy on the life of Jane and jane passes away, the proceeds are income and estate tax free at that time.

but, if John passes away the value of the life insurance policy, if any, is part of his taxable estate.

in addition, assets transferred between spouses (death or gift or incident to a divorce) are free of income and estate and gift taxes (except for "IRD" and "QDRO" and other rules about transferring what would be income in the givers hands).

[ej401]

Thanks MW,

"If John owns a life insurance policy on the life of Jane and Jane passes away, the proceeds are income and estate tax free at that time."

I understand above to mean that - if Jane passes away, proceeds are not income to John and are not estate taxable for Jane's estate.  Do I understand correctly?  (Note:  the policy is a term life policy.)


In another scenario:  Jane owns a term life policy on her mother.  When mother passes away, proceeds are not income to Jane and not estate taxable for mother's estate, as above?

Thanks so much for your kind help.

[mwcpa]

"I understand above to mean that - if Jane passes away, proceeds are not income to John and are not estate taxable for Jane's estate. Do I understand correctly? (Note: the policy is a term life policy.)"

Yes, you understand correctly.

"Jane owns a term life policy on her mother. When mother passes away, proceeds are not income to Jane and not estate taxable for mother's estate, as above? "

Correct.