How Does Life Insurance Affect My Income Taxes?

As the proverb says, nothing is certain but death and taxes. However, federal income taxes on the death benefit of a life insurance policy are not certain. The beneficiary of a life insurance policy does not owe federal income taxes on the amount paid to him or her as death benefits of the policy.

Estate taxes are another matter. If the deceased person owned the life insurance policy, then the policy will be included in his or her estate. The total value of the estate, including the life insurance policy, must be more than 3.5 million dollars for estate taxes to be due.