Is a life insurance payout taxable?

The general rule

The Life Insurance Proceeds section of Publication 525 starts with the rule: proceeds paid to you because of the death of the insured are generally not taxable. Two situations break the rule at the outset. The first is a policy that was turned over to you for a price. The second is a policy acquired in a reportable policy sale. In both cases the buyer is not simply a beneficiary, and the exclusion is lost. The exclusion also holds when the proceeds are paid under an accident or health insurance policy, or an endowment contract issued on or before December 31, 1984. Interest earned on proceeds is a separate matter and may be taxable.

Lump sum versus installments

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

If you take the proceeds in installments, you can exclude part of each installment. The excluded part is the amount held by the insurance company (generally the total lump sum payable at death) divided by the number of installments. Anything over that excluded part is interest, and you include it in income. For installments for the rest of your life with no refund or period-certain guarantee, divide the amount held by your life expectancy instead; if there is a guarantee, the amount held is reduced by the actuarial value of the guarantee.

Worked example from Publication 525

Example 25: the face amount of the policy is $75,000 and, as beneficiary, you choose 120 monthly installments of $1,000. The excluded part of each installment is $625 ($75,000 divided by 120), or $7,500 for a year. The rest of each payment, $375 a month or $4,500 for a year, is interest income. The calculator above runs the same arithmetic for any face amount, installment count and payment.

Surviving spouse and interest-only options

If your spouse died before October 23, 1986 and the proceeds are paid in installments, you can exclude up to $1,000 a year of the interest included in the installments, and you can keep taking the exclusion if you remarry. If an insurance company pays you only interest on proceeds left on deposit, that interest is taxable. For a spouse who died before October 23, 1986 and who chose interest only, the $1,000 interest exclusion does not apply, though it is available from the time installments begin if you later switch.

Employer-owned life insurance

If you are the policyholder of an employer-owned life insurance contract, you must include in income any proceeds received that exceed the premiums and any other amounts you paid. The rule applies if you have a trade or business, own a contract on the life of your employee, and you or a related person are a beneficiary. You can still exclude the full amount if, before the policy is issued, you give the employee written notice and the employee gives written consent, and either the person was your employee within 12 months before death (or a director or highly compensated employee when the contract was issued) or the amount is paid to the employee’s family or designated beneficiary.

Surrender, endowment and split-dollar contracts

If you surrender a policy for cash, you include in income any proceeds more than the cost of the policy, generally total premiums paid less refunded premiums, rebates, dividends or unrepaid loans not included in income. You should receive a Form 1099-R showing total proceeds and the taxable part, reported on lines 5a and 5b of Form 1040 or 1040-SR. Endowment proceeds paid in a lump sum at maturity are taxable only to the extent they exceed your cost. A split-dollar arrangement is taxed under either the economic benefit rule or the loan rule, never both for one policy.

Related rules

Payments made before death on the basis of terminal or chronic illness are covered by the accelerated death benefit rules; see are accelerated death benefits taxable. This page summarizes the Pub. 525 (2025) text and does not cover estate tax.

Related Publication 525 topics

More from the same IRS publication: Are accelerated death benefits taxable?, Is disability pension taxable income?, Is forgiven debt taxable income?.

Sources

• IRS Publication 525, Taxable and Nontaxable Income (2025): the “Life Insurance Proceeds” section and the sections it cross-references. Read November 2, 2026.

Edition read: Publication 525 (2025), for use in preparing 2025 returns. Dollar limits and dates in this publication are for 2025; check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it.