Question

IRS Publication 525 has a section on Life Insurance Proceeds. Please review this section and answer the following items: 1. As a general rule, are life insurance proceeds that are received as a lump sum included in income (assuming they are related to an individual passing away and the recipient being the intended beneficiary)? 2. If a recipient chooses to receive life insurance proceeds in installments, can some of the income they receive be considered taxable income? 3. If the face amount of a policy is $120,000 and as a beneficiary of the policy you choose to receive 120 monthly installments of $1,400 each, what would be your excludable part of the related income for the year and what would be the taxable part of the income for the year? 4. If you surrender a life insurance policy for cash, what must you include in your income?

Answer 1

1) If death benefits are paid in a lump sum or other than at regular intervals, inlclude in gross income only the benefits that are more than the amount payable by the beneficiary at the time of the insured person’s death. If the benefit payable at death is not specified, include in income the benefit payments that are more than the present value of the payments at the time of death.

2) If a recipient chooses to receive life insurance proceeds in installments, beneficiary can exclude part of each installment from his/her income. To determine the excluded part, divide the amount held by the insurance company (generally the total lump sum payable at the death of the insured person) by the number of installments to be paid. Include anything over this excluded part in income as interest.

3) Excludable part of the related income for the year is calculated as below:

Amount (1,20,000) held by the insurance company divided by number of installments (120)

i.e $1,000

Taxable part of the income for the year is $1,400 - $1,000 = $ 400

4) If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the amount of premiums that you paid.