Can I Exclude Life Insurance Proceeds from My Income?

Yes — life insurance death benefits paid to a beneficiary are generally excluded from the beneficiary's taxable income. If a $1 million policy pays out, the beneficiary doesn't owe income tax on that $1 million. However, interest earned on life insurance proceeds held by the insurer (for example, if the payout is delayed and earns interest) is taxable. If you receive a cash value payout from a surrendered life insurance policy, only the amount above what you paid in premiums (your basis) is taxable. Proceeds may be includable in the deceased's estate for estate tax purposes, even if not subject to income tax.