Is life insurance taxable?

Life insurance is taxable but only on any interest accrued as part of your cash value or death benefit. The death benefit a beneficiary receives is not taxable. If you do not have a named beneficiary or your beneficiary has died, your death benefit will go to your estate, where it will be subject to tax. If you withdraw money from your cash value, that money will not be taxed. Only interest received on your life insurance is taxable.

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Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states. After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health in...

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Benjamin Carr was a licensed insurance agent in Georgia and has two years' experience in life, health, property and casualty coverage. He has worked with State Farm and other risk management firms. He is also a strategic writer and editor with a background in branding, marketing, and quality assurance. He has been in military newsrooms — literally on the frontline of journalism.

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Reviewed by Benji Carr
Former Licensed Life Insurance Agent

UPDATED: Jul 21, 2021

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Quick Facts

  • A life insurance death benefit is not taxable unless the death benefit becomes part of your estate
  • If you withdraw your cash value early, any interest accrued could be subject to tax
  • Always update your beneficiary to ensure your death benefit gets paid out to the right party

When it comes to handling your term or permanent life insurance policy, many people have a lot of questions. One question many people often have is, “is life insurance taxable?”

Well, depending on whether or not you’re the policyholder or the beneficiary, this question has a lot of different scenarios. We’re here to help you navigate this complex process.

Keep reading below to learn if life insurance is taxable when cashed out, if life insurance is taxable to an estate, and if a life insurance death benefit is taxable. But before you do, enter your ZIP code into our free comparison tool above to find affordable life insurance near you.

Is life insurance taxable if cashed out?

One question many people have is, “is life insurance taxable if cashed out?” Since many people use their life insurance policies as a way of investing money over time, this is an important thing to know.

If you have a cash value life insurance policy, you may wish to access that money before your policy expires. You can do this as a withdrawal or as a loan, or by simply ending the policy altogether.

When you pay your life insurance premium, part of that money goes into your cash value. This cash value gains interest over time, just as it would in a bank account. This money is tax-free as long as it stays in your cash-value account.

However, once you withdraw that money, you may be wondering, “is life insurance taxable income?” Unfortunately, yes. The money that came out of your premium won’t be taxed, but any interest that accrued over time can be taxed.

The same goes for if you cancel the policy and take the cash value. You’ll get whatever money you paid into it back plus interest, but the interest is subject to taxes. Your life insurance company may also charge a surrender fee if you cancel your policy early.

If you’re interested in opening a cash value life insurance policy, you can start by getting a quote online. Compare life insurance quotes from multiple companies to find the best deal.

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Is life insurance taxable to an estate?

Another question people have is, “is life insurance taxable to an estate?”

If you don’t name a beneficiary for your life insurance policy or your beneficiary passes away, your death benefit goes into your estate. This means that the death benefit will become taxable just like the rest of your estate.

This is why it’s important to update your life insurance policy regularly. If your named beneficiary passes away, you’ll need to name someone else to replace them as soon as you can. You don’t want to lose your death benefit for your family.

If you’re considering updating your life insurance policy or even switching providers, compare life insurance rates online to find an affordable deal. We recommend comparing at least three life insurance companies to find the best rate.

Is a life insurance death benefit taxable?

When you die, your life insurance policy pays out a death benefit to your beneficiary. This can be your spouse, child, or even a friend. But is a life insurance death benefit taxable income?

Fortunately, a life insurance death benefit is not taxable income. Your beneficiary has full access to the death benefit funds of your life insurance policy and those funds can not be seized to pay for outstanding debts.

However, according to the Internal Revenue Service, any interest you receive as part of the death benefit is taxable. You should report any interest received to avoid any future complications with the law.

As we mentioned earlier, the only way the death benefit can be taxed is if it becomes part of the insured’s estate because there is no named beneficiary. This is why it’s important to update your beneficiary as soon as you can.

Now that you know the answer to the question, “is life insurance taxable?” start shopping today. Enter your ZIP code into our free comparison tool below to buy life insurance from providers in your area.

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