Do You Have to Pay Taxes on Life Insurance?

Having a good life insurance policy is important if you've got dependents that will require support in case you pass.    I've got a pretty sizable life insurance policy myself and my wife has a policy as well.   I don't know if I've ever really researched if you have to pay taxes on a life insurance payment in the case of the death of the insured person.   I think I just assume that it was tax free.   But better to make sure than be caught unaware with a giant unexpected tax bill.

According to the IRS topic : Taxable or Non-Taxable Income? they say:

"Life insurance proceeds, which were paid to you because of the insured person’s death, are generally not taxable unless the policy was turned over to you for a price."

So that settles it.   Life insurance  payments to beneficiaries are not taxed.   Good, thats what I thought.

On the other hand if you cashed out a life insurance policy then you may owe taxes on gains.  The IRS says " If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy."    Thats basically since the insurance functioned as an investment for you.

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