Is Life Insurance Taxable?

Is a Life Insurance Payout Taxable?

Life insurance payouts are generally tax-free. If someone has made you the beneficiary of a $1 million policy, you don't have to share any part of your $1 million with the federal government. There are, however, a few cases where taxes may apply.

Interest Payments

If your life insurance payout includes interest earned after the time of death but before the time of the payout, that interest is taxable as income. As an example, say you receive your payout in regular installments as an annuity instead of as a lump sum. Your annuity payments will include principal and interest. The interest portion of your payments are taxable.

Estate Taxes

A life insurance payout that's part of a larger estate may trigger estate taxes. As of 2025, estates with a total value of $13.99 million or less are exempt from federal estate taxes. (That figure will rise to $15 million in 2026.) If a life insurance payout is part of an estate that's worth more than $13.99 million, federal estate taxes will apply. Also note: Some states also levy estate taxes, and state limits may be significantly lower than federal limits.

Learn more: How Do Life Insurance Payouts Work?

Are Cash Value Withdrawals Taxable?

A cash withdrawal from your permanent life insurance policy may be partially taxable if you withdraw more than you paid in premiums. Permanent life insurance policies—including whole life, universal life and variable universal life insurance—pay a death benefit but also may accrue cash value. Cash value withdrawals are typically tax-free up to your costs basis, or the amount you've contributed in premiums.

However, if you withdraw more than you've paid in premiums, the excess amount may be taxable. Say your life insurance has an accumulated cash value of $14,000 and you've paid $10,000 in premiums. You'll pay tax on $4,000 if you withdraw $14,000.

Withdrawing cash can have repercussions to both your taxes and your life insurance policy. Study up on your options before you make this move to avoid any unwanted consequences.

Is Group Life Insurance Taxable?

The first $50,000 of term life insurance offered as an employee benefit is tax-free. The IRS excludes the premium payments your employer makes on your behalf from your taxable income. As long as your benefit is $50,000 or less, there's no tax consequence to you.

What if You Have More Than $50,000 in Coverage?

If you opt to carry more than $50,000 in coverage, your employer will report the cost of the additional coverage as income. That additional cost is subject to Social Security, Medicare and income taxes. The IRS doesn't use the actual cost of coverage; it imputes the cost based on predetermined amounts. If you're age 40 to 44, for example, the imputed cost of $50,000 in coverage is $5 per month.

Is Life Insurance Tax Deductible?

When you purchase your own life insurance, your premiums are considered a personal expense and are not tax deductible.

Businesses may deduct the cost of life insurance premiums if they offer group life insurance as an employee benefit and neither the business nor the business owner is a beneficiary. Additional IRS guidelines apply, so consult a tax professional if you're interested in claiming a business deduction for life insurance.

The Bottom Line

Although life insurance premiums are not deductible, the overall financial benefits of life insurance can be critical, including the ability to maximize the money you pass along to heirs or to charity. Learn more about the different types of life insurance and how to choose coverage that works best for you.