Is Life Insurance Taxable? — Benefits, Premiums & Funerals

Is A Life Insurance Payout Taxable?

Life insurance payouts are not typically taxed. The Internal Revenue Service (IRS) largely doesn’t tax on a payout because they’ve already taxed that money – the policyholder pays into the plan presumably with after-tax income.

However, some specific cases may cause a life insurance payout to be taxed. They often depend on the plan’s payout structure and how beneficiaries are classified. Cases where life insurance payouts may be taxed include:

Life Insurance Annuity Payouts

Life insurance death benefits are usually paid as a one-time lump sum payment. However, some policy payouts are structured as a deferred annuity, meaning it’s paid over time in several smaller sums.

These accounts often gain cash value over their lifetime from investment performance or interest growth. If the account gains value beyond the cash basis (the total amount paid into the account from premium payments), it may be taxable.

Cash Value Withdrawal Limits

Most whole life plans place a portion of paid premiums into high-yield savings accounts to grow cash value over the policy’s lifetime.

Many providers allow the policyholder to withdraw cash as a loan against the policy’s value. Similar to how life insurance annuity payments are handled, if the total value of withdrawn cash exceeds that of the paid premiums cash basis, that excess is likely taxable.

Tax on Life Insurance Surrender

Policyholders who no longer want a life insurance policy can surrender the contract directly to the insurance provider or a life insurance buyout service. If the policyholder surrenders the contract to the insurer, any money already paid into the policy will be refunded.

Just like the above cases, any earnings that exceed the policy’s premium cash basis may be taxed as income.

Imputed Life Insurance Tax on Employer-Paid Group Life Plans

Some workplaces offer employer-paid group life insurance programs. However, payouts from group plans may be taxed.

Life insurance payouts from employer-paid plans are taxable if their value exceeds $50,000 and the policy is considered to be carried by the employer. Per IRS guidelines, a life insurance policy is carried if the employer pays any of the policy’s costs or arranges employee premium subsidies.

Life Insurance Estate Tax

If a life insurance payout is part of a deceased person’s (or decedent’s) estate, taxes may be owed if the estate’s value exceeds a certain threshold.

Below is a portion of the IRS estate tax threshold table over the past several years. If an estate’s value exceeds these amounts or includes a life insurance payout, it’s subject to an estate tax.

Year of Death	Estate Filing Threshold
2022	$12,060,000
2023	$12,920,000
2024	$13,610,000
2025	$13,990,000

How to Report Life Insurance on Taxes

Generally, a beneficiary receiving a life insurance payout doesn’t need to report the proceeds as income.

However, some policies, such as certain universal life insurance plans or annuities, may pay interest based on the policy’s cash value. Any interest received is taxable and should be reported on IRS interest documents.

There are also some tax consequences for changing the ownership of a life insurance policy’s death benefit.

If the policy was transferred to the beneficiary for cash or other valuable considerations or as a gift, it may be subject to taxes. Typically, policy transfers would be reported as standard income or on a tax interest or distribution document. Per the IRS, general life insurance tax exclusions are limited to the value paid for the transfer.

What is a Tax Deduction?

Tax deductions are used to reduce taxable income. Most Americans opt for a standard deduction, but in some cases, itemizing deductions like charitable contributions, business expenses, and more can result in a larger tax deduction.

Itemizing tax deductions can be a great way to save big on taxes, but it requires significantly more involvement in personal finances and the tax filing process.

A major advantage of life insurance is that it’s typically purchased with after tax income. However, as a life insurance policy often isn’t paid to the policyholder, you may wonder if life insurance premiums are tax deductible.

Are Life Insurance Premiums Tax Deductible?

Unfortunately, life insurance premiums usually aren’t tax deductible, as the IRS considers them to be personal expenses. However, there are some rare exceptions:

When Are Life Insurance Premiums Tax Deductible?

In some rare cases, life insurance premiums can be tax deductible. Cases include:

Life insurance tied to divorce proceedings before 2019
Premiums paid for life insurance tied to divorce proceedings usually aren’t tax-deductible. However, if you have an alimony or divorce requiring that you pay for life insurance on your ex-spouse that went into effect before 2019, it could be tax-deductible. This only applies if your ex-spouse is not the beneficiary of your policy.

Small business group life insurance plans
A small business can claim premiums paid for group life insurance plans for employees as tax deductions. However, neither the business owner nor the company can be the policies’ beneficiary. Premiums cannot be deducted if the death benefit coverage is over $50,000. The IRS treats premiums paid for coverage above this amount as employee wages, which you can’t deduct from taxes. Premiums also can’t be tax deductible if you’re an owner of a sole proprietorship or if you’re a business owner and your spouse is an employee of the company.
Donating your policy to charity
If a charity is the beneficiary of your policy, premiums paid toward the policy after the donation is made are tax-deductible. This is usually done with a whole life policy.

Are Funeral Expenses Tax Deductible?

Life insurance payments aren’t, but are funeral expenses tax deductible? After all, they’re getting quite expensive, with average funeral costs nearing $10,000.

Unfortunately, funeral expenses are not tax deductible in most cases. If the funeral is for a loved one and paid with personal or family funds, funeral costs are often not deductible. However, if the funeral is paid for by an estate, expenses could be reimbursed on a federal estate tax return, claimed on IRS Form 706.

Funeral expenses that can be claimed as deductibles by an estate must be “reasonable expenses”, per the IRS.

What Funeral Expenses Can Be Deducted?

Funeral expenses that an estate can claim as deductible payments include:

The casket or urn
Interment or burial plot costs
Cremation or embalming
Tombstone or grave markers
Funeral home services
Funeral director fees
Officiant fees
Floral and catering fees

All of these costs add up; the average funeral costs nearly $10,000, so itemizing these costs as tax deductions could lead to big savings, especially for a pricier funeral.

Funeral Expenses That Can’t Be Deducted

Only estates can deduct funeral expenses, not individuals. However, the IRS doesn’t consider some funeral and burial costs necessary. These costs may not be deductible expenses. These may include:

Travel expenses for guests
Lodging for guests

If any fees are covered by government programs or insurance companies, their costs also aren’t tax deductible.

Estate Tax Deductions for Funeral Expenses by State

Federal estate tax rules differ from state rules. The estate tax threshold for filings for the 2024 tax year is $13.61 million.

That threshold differs in Washington, D.C., and 12 states. Estates located in these states that exceed the taxation threshold are subject to estate taxes. Therefore, they’re eligible for funeral expense tax deductions. Estates valued below these thresholds aren’t required to file taxes and are ineligible for deductions.

Below is each state and their taxable thresholds for deductions:

State	Deduction Threshold
Connecticut	$13.6 million
District of Columbia	$4.5 million
Hawaii	$5.5 million
Illinois	$4 million
Maine	$6.8 million
Maryland	$5 million
Massachusetts	$2 million
Minnesota	$3 million
New York	$6.9 million
Oregon	$1 million
Rhode Island	$1.8 million
Vermont	$5 million
Washington	$2.2 million

Information courtesy the American College of Trust and Estate Counsel.

How Estates Can Claim Deductions

Estates must follow three rules to claim funeral expense tax deductions:

Use IRS Form 706: U.S. Estate Tax Return
Executors of an estate must use Form 706 to claim funeral expenses and deductions on tax returns. Form 1041 is used only for taxable income and does not include deductible funeral expenses.
Meet the filing threshold
For an estate to be able to claim funeral expenses as deductibles, it must also meet the federal threshold for estate taxes. The 2024 filing threshold is $13,610,000. If the estate’s value is less than that threshold, it’s not required to file for estate taxes. Unfortunately, estates that don’t file estate taxes also can’t claim funeral expenses as deductions.
Exclude reimbursements
Funeral expenses intended for deductions must exclude any amounts reimbursed to the estate. This includes any type of federal aid, such as Social Security death benefits, Veterans Affairs funeral assistance, and any reimbursements from insurance policies.

Final Expense Insurance Can Cover Your Funeral Tax-Free

Funeral expenses are tax deductible only in certain scenarios that don’t apply to most people. However, life insurance could be a major help thanks to the tax-free benefit payment. A solid final expense policy could be a low-cost way to cover funeral expenses without relying on unreliable tax deductions.

You could be eligible for a no-wait final expense insurance policy even if you have a preexisting medical concern like diabetes or are a smoker.

Guaranteed life insurance can be a reliable option for those with major health conditions such as Dementia or cancer.

Final expense insurance can be a great option for anyone looking to cover their funeral ahead of time, and the best part is that costs aren’t unaffordably high.

Below are sample quotes for a $10,000 final expense insurance policy for a non-smoking applicant with no preexisting conditions from our top providers:

Company	Male 50y/o	Female 50y/o	Male 60y/o	Female 60y/o	Male 70y/o	Female 70y/o
Aetna / Accendo (CVS Health)	$34	$27	$50	$40	$70	$56
Americo	$31	$26	$43	$35	$71	$53
Mutual of Omaha	$31	$24	$44	$33	$75	$53
Prosperity	$34	$29	$45	$35	$79	$59
Corebridge	$33	$26	$48	$36	$82	$58

These figures are estimates only, based on a $10,000 final expense insurance policy with no applicant pre-existing conditions.

If you’re interested in these or any of our other life insurance options, call us at (866) 786-0725 to learn more. Be sure to check our free online quoting tool for personalized pricing estimates.

Final Thoughts

So, is life insurance taxable? Usually no, but some factors could lead to your beneficiaries owing on your policy.

Likewise, a few conditions can cause life insurance premiums payments to be tax deductible, usually for businesses. Funeral expenses generally aren’t tax deductible, unless they are covered by an estate exceeding the federal estate tax threshold of $13.61 million.

Life insurance is a great way to provide for your loved ones once you pass. If you’re interested in learning more about life insurance or its tax implications, Final Expense Benefits is here to help.

For more information on life insurance, call us at (866) 786-0725 Monday through Friday, 9 a.m. to 5 p.m., or check our free online quoting tool.

FAQ

Is life insurance taxable to the beneficiary?

Typically, no. However, there are certain cases where your policy may be taxed. If you are curious about whether your beneficiary may be taxed on your held policy, check this IRS tool.

Do you have to pay capital gains tax on a life insurance payout?

No, as a standard lump-sum life insurance death benefit payout is not classified as a sale or exchange.

Are taxes owed if beneficiaries receive multiple life insurance policy payouts?

Having more than one policy will not inherently cause you to owe taxes, but taxes may be owed if any policies fall under the listed exception cases.

Would the policy type (whole life, term life, or universal life insurance) cause a life insurance payout to be taxable?

Whole life and term life policies will often have no differences in tax implications and will likely not be considered taxable income or capital gains. However, universal life insurance often pays interest based on the policy’s cash value. Any earned interest must be reported on taxes.

What are the tax differences between a life insurance death benefit payout and an inheritance payout?

Beneficiaries generally are not required to pay taxes on life insurance payouts, but inheritances are often taxed. Having a life insurance policy also avoids the transfer process, which can lead to complications in inheritance distributions.

How much does a funeral cost?

The typical funeral with a viewing and a burial is nearing $10,000 in the United States. This major cost highlights the need to prepare ahead of time. A final expense insurance policy is a great way to start saving for your end-of-life expenses and to cover your loved ones.

Is Life Insurance Taxable? — Benefits, Premiums & Funerals

Updated on Jan 21, 2025 • 4 min read