How Is Life Insurance Taxed? | Pacific Wealth Solutions

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How is Death Benefit Taxed?

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Along with the pain of losing a loved one, there are a lot of tedious tasks to take care of, such as sorting out financial matters. Life insurance alone can be a confusing and difficult mess if you are unfamiliar with the terms and processes. Fortunately, Pacific Wealth Solutions can help you determine how to move forward and answer all your questions, including, “How is life insurance taxed?”

How Is Life Insurance Taxed?

The simple answer is that the beneficiary of a life insurance policy is typically not expected to pay taxes on the amount they receive when a loved one passes away. However, there are exceptions you should be aware of. 

Taxable Interest

Some life insurance policies are written in a way that requires a predesignated waiting period before the beneficiary can receive payment. If this is the case, the beneficiary will then need to pay taxes on any interest that accrues during the waiting period.

Estate Tax

There are also life insurance policies that put all the assets of the deceased together, including property, investments, and life insurance payouts. This collective value after paying any debts owed is referred to as an estate and may be taxed. This is because the insurance is technically being paid to the estate, rather than a specific individual. If you know you will be leaving your loved ones with more than just a life insurance payout when you die, set aside extra time for estate planning (link to other article) when you put together your life insurance policy. This way, you can designate funds for the taxes on your property, rather than leave your loved ones responsible.


If you receive an inheritance from a parent, you may be subject to pay taxes on this amount. However, this is only the case in a handful of states in the U.S. Check to see if your state is one of these before assuming you are free and clear, but there is a good chance you will not have to pay taxes on inherited money. 

If the inheritance you receive is from a grandparent or other close relative, you probably will have to pay taxes on the amount. This is referred to as a generation-skipping tax. For customized estate planning advice, you can contact an attorney or ask Pacific Wealth Solutions for referral.

What If I Cash Out Part of My Life Insurance Before I Die?

Some life insurance policies accrue a cash value over time that can be taken out if needed. Typically, these are permanent life insurance policies, as opposed to term life insurance policies. If you withdraw any portion of your whole life insurance balance before you die, you will pay taxes on that amount as though it is income.

You may also decide to surrender, or cancel, your permanent life insurance policy and get a term life insurance policy instead. This is usually done when you are looking for a lower monthly premium when you are older and pretty sure you only need a 10 to 15-year policy, or when you have a sizable cash value accrued. If you cancel your policy to take out the cash value amount as a lump sum, you will only be taxed if that amount exceeds the amount you have paid up to that time, which is unlikely.

Pacific Wealth Solutions

Still have questions on how life insurance is taxed? Contact Pacific Wealth Solutions, we can help. Get a life insurance product today and start prepping for your future. 

Term Life Application Steps

Step 1: Apply Now

We will take you to the Coverpath term life page.

Fill out the “Get a Quote” questionnaire and click, “Apply Now.”

Coverpath Get a Quote

Step 2: Create an account.

Manage your policies and investment accounts.

Get help from MassMutual directly, or you can always contact PWS via live chat or email on our website.

Set preferences and notifications. Get helpful financial resources.

Step 3: Submit the application.

Sign in to your account and finish your application.

Submit the application and wait for approval

Permanent Life Application Steps

Step 1: Apply Now

Navigate to the Permanent Life Insurance page.. 

Click “Apply Now” and fill out the questionnaire. 

After the questionnaire is filled out, we will send you a customized link to continue the process. That’s it! 

Start planning for your future and apply for permanent life insurance.