Whole Life Insurance Estate Tax
Generally speaking, payouts from whole life insurance policies aren’t considered part of a beneficiary’s gross income, meaning that money isn’t subject to estate taxes. Things can become a little more complicated if the beneficiary receives the death benefit in installments or if the estate exceeds the federal estate tax threshold.
Whether you’re navigating the death benefit payout or looking for education about indexed universal life insurance, Everly Life has the answers you need for all of your life insurance questions. Whole life insurance for high-income earners can be particularly challenging to navigate without the proper guidance, especially when it comes to taxes.
In this post, we’ll uncover everything related to how estate taxes may apply to your whole life insurance death benefit payout.
What About for Beneficiaries?
Generally speaking, beneficiaries don’t need to worry about paying taxes on the death benefit they receive. Like we mentioned above, most payouts are not subject to taxation so long as the beneficiary is paid in one lump sum.
But what if they aren’t? If the beneficiary chooses to receive their death benefit payout in a series of payments over the course of several years‒also known as an ‘annuity’‒any interest accrued by the annuity account may be subject to taxes.
Estate Tax and Whole Life Policies
It’s important to note that a policyholder’s life insurance proceeds may be included on their estate once they have passed, which may impact taxation. First, consider that the federal estate tax threshold as of 2024 is is $13.61 million* and estate taxes must be paid on the amount that goes over this limit. However, this can also vary state by state. Some states will assess inheritance or estate taxes based on the estate’s value or where the policyholder lived.
To get a better idea of whether or not your estate qualifies for taxation, it’s important to connect with your Everly Life insurance agent and/or tax advisor to understand your policy and how taxes may impact your death benefit payout.
When Is a Whole Life Policy Taxable?
In addition to estate tax thresholds and annuity accounts, there are a few other times when you may be taxed on your whole life policy. For example, if you surrender your policy to the insurer for a cash payment and the surrender proceeds exceed the cumulative premiums, that excess amount could be subject to income taxes.
If you sell your whole life policy to a third party and the sale proceeds exceed your cumulative premiums, that excess could be subject to income taxes. This may only apply in cases where the sale proceeds exceed cumulative premiums minus the portion of your premiums that are attributed to the cost of insurance.
Finally, if you withdraw money or take a loan against your policy’s cash value account, you may have to pay income taxes on it. This generally happens when you withdraw more than your cumulative premium payments. In this case, you may have to pay income taxes on this excess.
Closing Thoughts
In most cases, you do not have to pay estate taxes on a whole life insurance’s death benefit. However, if the beneficiary opts to receive their benefit in installments or the estate is over the federal estate tax threshold, you may be subject to taxes on the death benefit.
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*https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
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The information above is for educational use only and does not represent insurance, tax or legal advice. It is not a recommendation or solicitation to buy insurance. Please talk to your licensed insurance agent for more information about life insurance and your needs. Please consult with the appropriate professional for tax or legal advice. Guarantees are backed by the claims-paying ability of the issuing insurance company.
Article Author: Meredith Bell
Author Bio: Meredith joined Everly in 2022 and has 20+ years of experience in the life insurance industry. She has held various roles in advertising, marketing, communications, sales and distribution support, and product development. Outside of the office, Meredith lives with her daughter Kennedy and their dog Mavis. Meredith enjoys cooking, camping, gardening, hiking, and bourbon (though not always at the same time). She is a live music enthusiast and an avid reader. Her favorite quote is by Thomas Jefferson: "I cannot live without books." Meredith agrees, but would add cheese, movies, and dogs to that list.