Is life insurance taxable?

Life insurance payouts generally aren't subject to income taxes or estate taxes. However, there are certain exceptions. The type of policy you have, the size of your estate, and how the benefit gets paid out can determine if life insurance proceeds can be taxed. Be sure to consult your tax advisor about your unique situation.

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Do beneficiaries pay taxes on life insurance payouts?

For the most part, beneficiaries don't need to pay taxes on the life insurance death benefit they receive, especially if they receive it as a lump sum. However, there are some very specific scenarios where you may have to pay federal or state taxes.

When might you pay taxes on life insurance?

If the life insurance policy goes into an estate
If the policy doesn't have any named beneficiaries, the life insurance proceeds may be included in the deceased's estate. If the value of the estate exceeds the federal estate tax threshold, which was $13.61 million as of 2024, estate taxes must be paid on the amount that's over the limit. Some states also assess inheritance or estate taxes, depending on the estate's value and where the deceased lived. Learn more about life insurance and estate planning.
You choose to receive the death benefit as an annuity
If a beneficiary chooses to receive their payout as an annuity (a series of payments over several years) instead of a lump sum, any interest accrued by the annuity account may be subject to taxes.
You withdraw or take out a loan against your whole life policy's cash value
When you buy whole life insurance, your premium is split between a cash value account and the policy's life insurance costs. As the cash value increases, you can choose to withdraw money or take out a loan against your whole life policy. If you withdraw more than your cumulative premium payments, you may have to pay income taxes on the excess.

Likewise, if you borrow against the cash value and the loan is still outstanding when the policy is terminated or surrendered, the loan amount in excess of the cumulative premiums may be subject to income taxes.
You surrender your whole life insurance policy
If you no longer want to keep your life insurance policy, you can surrender it to the insurance company in exchange for a cash payment. Note that some companies might charge you a surrender fee to complete this transaction.

If you surrender the policy and your surrender proceeds exceed the cumulative premiums, the excess may be subject to income taxes. But if the surrender value is less than the cumulative premiums you paid for the policy, you likely won't pay income taxes on the cash payment you receive from the insurer.
You sell your whole life policy
You can also sell your policy to a third party if you no longer want it. If the sales proceeds exceed your cumulative premiums, minus the portion of your premiums attributed to the cost of insurance, the excess may be subject to income taxes.

Pro tip:

Some insurers offer accelerated death benefit riders that allow the policyholder to access part of the policy's death benefit while they're alive to help pay for expenses related to a terminal illness. If you use the policy's accelerated death benefit, you don't have to pay income taxes on the money you receive, but it will reduce the amount your beneficiary gets when you die.

Types of taxes on life insurance

Inheritance or estate taxes

As a beneficiary, you might have to pay inheritance or estate taxes if the policy is part of the deceased's estate, and the value of the estate exceeds the state or federal estate tax threshold.

Income taxes

Beneficiaries may have to pay income taxes if they elect to receive the policy's death benefit as an annuity, since the interest accrued in the annuity account is considered taxable income. If you own a whole life policy, you may owe income tax if you sell or surrender your policy, or if you withdraw or borrow against your policy's cash value.

Pro tip:

Some life insurance companies offer dividends to whole life insurance policyholders. These are essentially a return of some portion of your premium dollars that the insurance company issues when the business is doing well. You generally don't pay taxes on life insurance dividends. However, if you let the insurer keep your dividends in exchange for interest, then you may pay income tax on the interest.

Is employer-paid group life insurance taxable?

Some companies offer group life insurance to employees as a supplemental benefit. According to the IRS, if you have less than $50,000 in coverage through your employer, you won't be responsible for paying taxes on the value of the coverage. But if the death benefit is greater than $50,000, the employer-paid premiums for coverage over $50,000 are subject to income taxes.

Compare life insurance rates and coverages

Quote life insurance online and choose your coverage amount, term length, and other policy details. You can also call 1-866-912-2477 to speak with a licensed Progressive Life by eFinancial representative who can help you find the right policy for you.