[Virlomi]

Do you have to pay income tax of life insurance payouts?

[MagicalT]

I found this answer on the web:

No because it is not "income". Income, which is what triggers income tax, is money I get in exchange for labor, whether it be paid in commissions, bonuses, wages or for barter. If I choose to buy an insurance policy, the payment that is made is not income because it is not the result of labor, but rather the payout of an investment I chose to make.

Next, since someone raised the issue, it also will not trigger estate taxes because the payment is not a probate asset, regardless of the size of the payout.

Basically, for estate purposes, we have two types of assets:

1. those that automatically become owned by others on our death without regard to whether I have a will or even had one, and

2. those that don't pass automatically to others and we have to look at your will, or the law of the state you died in, to determine who gets it. These assets are subject to distribution in probate court, and if the net value of your probate assets exceeds 1.2 million dollars, the estate has to pay some tax.

Assets that fit into the first category are not probate assets, even if they are worth 300 billion dollars and they are not subject to probate taxes. Examples of things that pass automatically to others are:

funds with designated beneficiaries (i.e. life insurance payments, pensions, etc.)

jointly owned assets which then are owned solely by the surviving owner on death. For example if my sister and I both own my house or car, etc. and I die, she owns those things automatically and they are non-probate assets. The furniture in it or things that are not jointly owned are probate assets but I am not at risk for having non-probate assets worth more than 1.2 million. If you are, talk to a financial advisor and they can help you hold your assets in ways so that they automatically pass to your survivors and either avoid or minimize your probate taxes.

Hope that helps.

[Fr_Chuck]

Normally no

There are a few exceptions but they will be complicated and involve business purchase as a key man policy where the company pays the premium.
But in those normally an attorney is working out the details