Proceeds from life insurance are generally not considered income or
reported as income if you receive them
under a life insurance contract because of the death of the insured person.
Any interest, however, that you receive would be taxable and needs to be
reported just like any other interest received. If the insurance proceeds are
delayed, there may be taxable interest on the non-taxable insurance proceeds.
You should receive a Form 1099-INT if you have taxable interest in the
proceeds.
When proceeds from a life insurance policy are transferred as part of a
financial arrangement before the insured’s death, it is taxable.
If no value was stated in
the policy, any amount in excess of the benefit’s stated value should be
reported as interest income. For example, if a lump-sum’s benefit value is
stated at $100,000, and you receive $115,000, the excess $15,000 is interest
and is the only part of the payment that should be reported as income
There are exceptions to this, for additional information, see IRS Publication 525, Taxable and Nontaxable
Income.
Accelerated death benefits paid to a terminally ill insured (with a
physician’s certificate showing a reasonable expectation of death within 24 months)
is not taxable. Accelerated death benefits used for a chronically ill insured’s
long-term care services are also not taxable. But per diem benefits over $300
per day are taxable.
When a life insurance policy is cashed out (surrendered), amounts up to the
total of the premiums and other contributions (the investment) in the policy
are not taxable. Amounts in excess of the policy holder’s total investment are
taxable.
