October 20, 2014 in Insurance

Will my life insurance beneficiaries owe taxes?

Dear Insurance Adviser,

After my death, does my family pay any state or federal taxes on the benefits from my life insurance policies?

— Howard

Dear Howard,

No, assuming that the beneficiary of your life insurance policies is a member or members of your family — your spouse or children — there are no income taxes at either the federal or state level. That is a huge selling point for life insurance.

Look up rates on life insurance

If, however, the policy’s proceeds end up being payable to your estate, federal estate taxes or state inheritance taxes could be assessed. That’s why it’s important to always name both a primary beneficiary and a contingent (or secondary) beneficiary, in case the primary beneficiary dies before you do.

Most people are pretty good about naming both a primary and a contingent beneficiary on their individually purchased life insurance policies. But, they often neglect to name a contingent beneficiary on their group life insurance through work. The reason is that group life application forms typically have just one box, labeled “Beneficiary.” If you have a contingent beneficiary to add, there’s usually room in the remarks section of the application.

I hope that helps.

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