Is a life insurance inheritance taxed??

The proceeds from a life insurance policy are not taxed.

Wow! So many myths.

Life insurance passes INCOME tax free....not ESTATE tax free. It IS subject to the estate tax rules (size matters...$2million in 2006 is the exclusion limit for non-spouses). This doesn't mean that there will be estate tax due, but it mean it is subject to the estate tax rules.

In other words, if life insurance proceeds when combined with your other assets appear to exceed the $2 million trigger point then you should consider removing the life insurance from your estate (unless you are certain your spouse will receive these benefits).

Consider gifting the policy or estatblishing a life insurance trust, but don't forget about the 3 year look-back period.

When a person insured by a life insurance policy dies during the term of the policy the proceeds are paid to the beneficiary or beneficiaries.

Life insurance death benefit proceeds are usually not subject to state and federal income taxation. But, if there is no beneficiary, the death benefit proceeds of the life insurance policy may be included in the estate of the deceased. Then, it may be subject to state, federal and inheritance taxes.

Also, the proceeds may be subject to federal estate taxation.

If you own all or part of the life insurance policy at the time of your death, the proceeds may be included in your gross estate for federal estate tax purposes.

Also, federal gift taxes and state inheritance taxes may apply to life insurance policy proceeds under certain circumstances.

You may want to consult a tax advisor regarding your questions about any estate, income and gift taxes related to any life insurance policies you own or are considering buying.

Also, your insurance agent should be able to tell you if your life insurance policy benefits will be taxable.

Finally, different taxes may apply to the benefits paid by your life insurance policy if the death benefit is paid to the beneficiary in installments, instead of as a lump sum. The interest portion, if any, of each installment is usually treated as taxable to the beneficiary at ordinary income tax rates, while the remaining principal portion is tax-free.

I hope that helps. Good luck to you.

As some have written, life insurance proceeds are SOMETIMES taxable. It depends entirely upon the circumstances. Here's information from an IRS Bulletin:

"Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract.

Proceeds not received in installments. If death benefits are paid to you in a lump sum or other than at regular intervals, include in your income only the benefits that are more than the amount payable to you at the time of the insured person's death. If the benefit payable at death is not specified, you include in your income the benefit payments that are more than the present value of the payments at the time of death.

Proceeds received in installments. If you receive life insurance proceeds in installments, you can exclude part of each installment from your income.

To determine the excluded part, divide the amount held by the insurance company (generally the total lump sum payable at the death of the insured person) by the number of installments to be paid. Include anything over this excluded part in your income as interest.

Example.

The face amount of the policy is $75,000 and, as beneficiary, you choose to receive 120 monthly installments of $1,000 each. The excluded part of each installment is $625 ($75,000 Ã· 120), or $7,500 for an entire year. The rest of each payment, $375 a month (or $4,500 for an entire year), is interest income to you.

Installments for life. If, as the beneficiary under an insurance contract, you are entitled to receive the proceeds in installments for the rest of your life without a refund or period-certain guarantee, you figure the excluded part of each installment by dividing the amount held by the insurance company by your life expectancy. If there is a refund or period-certain guarantee, the amount held by the insurance company for this purpose is reduced by the actuarial value of the guarantee.

Surviving spouse. If your spouse died before October 23, 1986, and insurance proceeds paid to you because of the death of your spouse are received in installments, you can exclude up to $1,000 a year of the interest included in the installments. If you remarry, you can continue to take the exclusion.

Interest option on insurance. If an insurance company pays you interest only on proceeds from life insurance left on deposit, the interest you are paid is taxable.

If your spouse died before October 23, 1986, and you chose to receive only the interest from your insurance proceeds, the $1,000 interest exclusion for a surviving spouse does not apply. If you later decide to receive the proceeds from the policy in installments, you can take the interest exclusion from the time you begin to receive the installments.

Surrender of policy for cash. If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. In general, your cost (or investment in the contract) is the total of premiums that you paid for the life insurance policy, less any refunded premiums, rebates, dividends, or unrepaid loans that were not included in your income.

You should receive a Form 1099-R showing the total proceeds and the taxable part. Report these amounts on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A."

I hope this helps.

If the proceeds are payable directly to a beneficiary, then no income tax is due. If it is paid to the estate of the insured, estate taxes may be due.

Not if you're paid out as the beneficiary of the policy. Yes, if the policy is paid to the estate, and you inherit the estate.

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