Are Life Insurance Payouts Taxed?

Most of us do not get a lot of practice learning our way around life insurance payouts. You may file a handful of auto and home insurance claims in your life, but life insurance benefits tend not to come along that often, so we wind up with a lot of questions. Here's a big one: Are life insurance benefits taxable? 

Life Insurance Benefits Are Generally Not Taxed 

If you're wondering if any sort of payout or income is taxed, it usually comes down to the question of whether they are considered "gross income." Many income types are not considered to be gross income — among them child support, social security, and life insurance. 

However, that does not mean that none of the money you've received relating to a life insurance policy is ever going to be taxed. There are several structures used for life policies. Many insurance plans do not pay out flat fees to the beneficiaries, but rather, invest that money into accounts, or even stocks and other investments. 

In the case of benefits accumulating interest, the income that comes from the interest will be taxed. That is, the entire amount is not taxed, but the interest is. Of course, when you get to the point where your life benefits are turning a profit, having to pay taxes on them isn't a bad problem to have. 

Life insurance benefits do not have to be reported to the IRS on your annual tax returns either, although money earned from interest will. 

Managing the money that comes from a life policy can be stressful. Hopefully, your loved one has left an attorney or someone in charge of handling their affairs, and they should be able to walk you through the proceedings. If not, feel free to call the insurer with any questions you may have.