Taxation of Life Insurance Benefits FAQ
Question – Are life insurance benefits from my mother’s estate taxable?
Answer – The best answer depends on three different circumstances.
• If the amount exclusively relates to a life insurance policy, then no amount is taxable and the fiduciary (life insurance company) should not have asked you to complete a Form W-9 or asked if you wanted any Federal or State income tax withheld.
• If the amount relates to an annuity whose fiduciary happens to be a life insurance company, then a portion of the required account liquidation is taxable (gross amount of contract less investment(s) made or allocated).
• If the amount relates to an IRA whose fiduciary happens to be a life insurance company, then a portion of the lump-sum or partial account withdrawal is taxable (you must consider any non-deductible contributions made and previously reported by the decedent on Form 8606).
