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Answered 2011-06-01 01:43:35

The death benefit on a life insurance policy is not taxable for federal income tax purposes.

However, the death benefit becomes included in the estate calculations of the deceased. So, depending on the estate tax laws in affect at the time of death, there may be estate taxes on the death benefit proceeds of the life insurance policy (but not income taxes).

Here's an example. If you are the beneficiary of a death benefit of $500k from your parent and your parent has no other assets, then there would likely be no taxes on the proceeds. If you are the beneficiary of a death benefit of $500k from your parent and your parent has more assets than the Federal estate tax exclusions in effect at time of death, then perhaps the $500k will have estate taxes due as part of the estate. This is because the addition of the policy proceeds to whatever else comprosed the estate may take the estate value over the limit such that taxes will be payable on it.

This was a simple example, and there are certainly many other possibilities and scenarios.

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