If you are the beneficiary of a life insurance policy, the payout — known as a death benefit — is typically tax-free. There are some exceptions, however.
Here's what you need to know about your tax liability if you receive proceeds from a life insurance policy.
When is life insurance taxed?
- When withdrawing money from cash value
- When surrendering the policy
- When it's an employer-paid group life insurance
- When the beneficiary is an estate
- When payment is in installments
- What to do with life insurance proceeds
- Bottom line
Compare and find the right life insurance policy
When withdrawing money from the cash value
Both whole life insurance and universal life insurance policies earn interest, referred to as cash value, and policyholders may be able to make withdrawals or take out a loan against the balance. If the withdrawal or loan is more than the total amount of premiums you've paid, the excess can be taxed.
MassMutual offers whole and universal life insurance up to age 60 or 90, depending on the policy. In 2023, it was one of JD Power's highest-ranking insurers for customer satisfaction and it received fewer complaints than expected for a company its size, according to the National Association of Insurance Commissioners.
MassMutual Life Insurance
Cost
The best way to estimate your costs is to request a quote
App available
Yes
Policy highlights
MassMutual has been in business for over 170 years, and carries the highest ratings for financial security from AM Best.
When surrendering a policy
If you cancel a whole life or universal life insurance policy, you typically receive the cash surrender value, which is your policy's cash value minus any fees. You don't have to pay taxes on the principal when it's returned, but any cash value your policy has accrued will be taxed as income.
Pacific Life offers a cash value enhancement rider that increases the cash surrender value of your policy if you need to cancel it within the first 10 years. The California-based insurer has a variety of cash-value policies, including indexed universal life insurance, which earns interest by tracking an index like the , and variable life insurance, which allows the policyholder to directly invest in securities.
Pacific Life Life Insurance
Cost
The best way to estimate your costs is to request a quote
App available
No
Policy highlights
Pacific Life offers permanent life insurance policies in addition to term insurance. A number of riders make it possible to customize the policy to fit your needs.
When it's an employer-paid group life insurance
If you are receiving proceeds from an employer-paid life insurance policy, any death benefit beyond $50,000 is taxed as income, according to the IRS.
When payment is in installments
If you receive a policy payout in installments rather than as a lump sum, any interest that accrues is taxable. The principal death benefit is still not taxed.
When the beneficiary is an estate
If your estate is the beneficiary of your life insurance policy, the death benefit may be subject to estate taxes. In 2024, the federal estate tax ranges from 18% to 40%, depending on how much of the estate is over $13.61 million, the exclusion limit. for 2024 Without congressional action, the limit will revert to $5 million (indexed for inflation) at the start of 2026.
In addition to the federal tax, twelve states and theDistrict of Columbiaimpose an estate tax, with the exemption limit ranging from $1 million in Oregon to $13.61 million in Connecticut.
What to do with life insurance proceeds
If you've received a life insurance death benefit, that money can help solidify your financial future.
Pay off debt
A life insurance payout can chip away at high-interest debt like credit card bills and help raise your credit score. (On-time payments represent 35% of your credit score and the total amount you owe is another 30%.)
One way to address mounting card bills is a balance transfer to a card with a 0% introductory APR. The Wells Fargo Reflect® Card has no interest for 21 months from account opening on purchases and qualifying balance transfers (with an 18.24%, 24.74% or 29.99% variable APR after that).
Wells Fargo Reflect® Card
Rewards
None
Welcome bonus
None
Annual fee
$0
Intro APR
0% intro APR for 21 months from account opening on purchases and qualifying balance transfers.
Regular APR
18.24%, 24.74%, or 29.99% Variable APR on purchases and balance transfers
Balance transfer fee
5%, min: $5
Foreign transaction fee
3%
Credit needed
Excellent/Good
See rates and fees. Terms apply.
An emergency fund
It's a good rule of thumb to save at least three to six months' worth of living expenses. It should be an account you can make penalty-free withdrawals from to handle a job loss, medical emergency, home repairs or other unforeseen cost.
LendingClub's high-yield savings account has one of the highest yields we've reviewed, with only a $100 opening balance requirement and a free ATM card.
LendingClub High-Yield Savings
LendingClub Bank, N.A., Member FDIC
Annual Percentage Yield (APY)
5.00%
Minimum balance
No minimum balance requirement after $100.00 to open the account
Monthly fee
None
Maximum transactions
None
Excessive transactions fee
None
Overdraft fees
N/A
Offer checking account?
Yes
Offer ATM card?
Yes
Terms apply.
UFB Secure Savings HYSA has a 5.25% annual percentage yield and no monthly fee or minimum balance requirement. Policyholders get a free ATM card and can transfer between direct deposit accounts for free.
UFB Secure Savings
UFB Secure Savings is offered by Axos Bank ® , a Member FDIC.
Annual Percentage Yield (APY)
Up to 5.25%APY on any savings balance; add a UFB Freedom Checking and meet checking account qualifications to get an additional up to0.20%APY on savings
Minimum balance
$0, no minimum deposit or balance needed for savings
Fees
No monthly maintenance or service fees
Overdraft fee
Overdraft fees may be charged, according to the terms; overdraft protection available
ATM access
Free ATM card with unlimited withdrawals
Maximum transactions
6 per month; terms apply
Terms apply.
Read our UFB Secure Savings review.
Save for retirement
An IRA is a great tool for building your nest egg: In 2024, you can contribute a total of $7,000 to all your IRAs (or $8,000 if you're 50 or older). Fidelity's IRA is a solid choice for beginners, combining an easy-to-navigate platform and a variety of investment options with no account fees or minimums.
Fidelity Investments
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Fidelity Go®account, but minimum $10 balance according to the investment strategy chosen
Fees
Fees may vary depending on the investment vehicle selected. Zero commission fees for stock, ETF, options trades and some mutual funds; zero transaction fees for over 3,400 mutual funds; $0.65 per options contract. Fidelity Go® has no advisory fees for balances under $25,000 (0.35% per year for balances of $25,000 and over and this includes access to unlimited 1-on-1 coaching calls from a Fidelity advisor)
Bonus
Find special offers here
Investment vehicles
Robo-advisor: Fidelity Go® IRA: Traditional, Roth and Rollover IRAs Brokerage and trading: Fidelity Investments Trading Other:Fidelity Investments 529 College Savings; Fidelity HSA®
Investment options
Stocks, bonds, ETFs, mutual funds, CDs, options and fractional shares
Educational resources
Extensive tools and industry-leading, in-depth research from 20-plus independent providers
Terms apply.
If you want a hands-off investing experience, Betterment is CNBC's top choice for robo-advisors, allowing you to open a traditional or Roth IRA with as little as $10. There is also a premium plan for savers investing at least $100,000 with unlimited access to certified financial planners.
Betterment
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. For example, Betterment doesn't require clients to maintain a minimum investment account balance, but there is a ACH deposit minimum of $10. Premium Investing requires a $100,000 minimum balance.
Fees
Fees may vary depending on the investment vehicle selected, account balances, etc. Click here for details.
Investment vehicles
Robo-advisor: Betterment Digital Investing IRA: Betterment Traditional, Roth and SEP IRAs 401(k): Betterment 401(k) for employers
Investment options
Stocks, bonds, ETFs and cash
Educational resources
Betterment offers retirement and other education materials
Terms apply. Does not apply to crypto asset portfolios.
Find an investment account that works for you
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Bottom line
While life insurance benefits are typically not taxed, there are some circ*mstances when a payout can expose you to tax liability, including receiving it in installments.
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At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every insurance article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of insurance products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.
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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
