In short
Death benefits from life insurance are generally excluded from the beneficiary's gross income, and growth in a policy's cash value is tax-deferred. If a policy is sold for value, though, proceeds above the buyer's cost become taxable.
Key takeaways
- The transfer-for-value rule doesn't apply to transfers to the insured, a partner of the insured, a partnership with the insured as partner, or a corporation where the insured is a shareholder or officer.
- Proceeds are in the insured's estate if the insured held any incidents of ownership or transferred the policy within 3 years of death.
- Holding the policy in an irrevocable life insurance trust keeps it out of the estate.
Where it's tested
TCP: Personal Financial Planning — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A beneficiary receives $500,000 of life insurance proceeds, paid in a lump sum because the insured died. How much is included in the beneficiary's gross income?