July 31st, 2006 | 
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Nicole’s Dad asked:
I have a term life insurance policy with my spouse as the sole beneficiary. I wanted to know if she were to collect on that policy, are there any taxes due on the face value or would she be entitled to the full face value of the policy?
Chin Sterpka
I have a term life insurance policy with my spouse as the sole beneficiary. I wanted to know if she were to collect on that policy, are there any taxes due on the face value or would she be entitled to the full face value of the policy?
Chin Sterpka
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They are not taxable, at least on the federal level.
they are not taxable unless the total estate is well over one million dollars.
Yes they are. There are no federal taxes on the death benefit of life insurance unless they are paid to an estate. This only happens if the insured outlives the beneficiaries without designating a new one. If it is paid to an estate it will then become part of the estate and incure estate taxes.
They are not taxable, the way you have it set up.
There are no income taxes due on life insurance proceeds, and with the unlimited spousal deduction, she wouldn’t have to worry about federal estate taxes either.
This does not mean if you have a large estate, it wouldn’t eventually need to pay estate taxes, but your wife would not have that burden. If your total estate (including the life insurance) is over $1.5 – 2.5 million (depending on whose crystal ball you are using) you should consider talking with an attorney to help minimize the taxes your estate would pay after both of you are gone.
No, there are not taxes on the death benefit because the premium are payed with taxed dollars so she should receive the entire amount.
Your heirs pay NO income tax on proceeds. Your beneficiaries receive death benefits completely free of income taxation. Therefore, a $500,000 policy delivers $500,000 in benefits with no deductions and no withholding required. This is true with all life insurance policies, both term and cash value. There will be NO TAXES on the death benefit at all.
If you have a large estate (excess of $2 million) and you both die this year, your heirs will have to pay 45% in estate taxes. If you die in 2010 however, there will be NO ESTATE taxes due. Only in 2010 will this 0% be in effect, the amount will reset again in 2011 at 60% for over $1 million in an estate. If you have a large estate such as $1 million or more, it would be beneficial to get a Survivorship Policy which will remain in effect until you both pass away and your heirs will receive enough money to pay the estate taxes that will be due.
No. Should you pass away, the face value of the policy will be tax free.