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Principles of Risk Management and Insurance, 13th Edition by Michael McNamara, George E. Rejda

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Taxation of Life Insurance

Treatment of life insurance buying would be incomplete without a discussion of the taxation of life insurance. This section discusses briefly the taxation of life insurance.

Federal Income Tax

Life insurance proceeds paid in a lump sum to a designated beneficiary are generally received income-tax free by the beneficiary. If the proceeds are periodically liquidated under a settlement option, the payments consist of both principal and interest. The component attributable to the principal is received income-tax free, but the interest is taxable as ordinary income.

Premiums paid for individual life insurance ­policies generally are not deductible for income-tax purposes. Dividends on life insurance policies ­generally are ...

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