Are the Benefits from a Life Insurance Policy Taxable?

Life insurance payouts are generally not taxable, as long as certain rules are followed. However, there are exceptions. If a business owns the policy and incorrectly deducts the premiums as a business expense, the death benefit could be taxed. Similarly, if the policy owner, insured, and beneficiary are three different people, the IRS may classify the payout as a taxable gift. For those with large estates, the policy’s value could be included in estate taxes, even though the beneficiary doesn’t owe income tax. These cases are uncommon, so most life insurance benefits remain completely tax-free to beneficiaries.