Rules for Taxation of Life Insurance

Rules for Taxation of Life Insurance

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Below are some quick and dirty rules for taxation of life insurance.

  1. Proceeds from a life insurance policy are excludable from gross income.
  2. Interest earned on life insurance proceeds is not excludable from gross income.
  3. If the TP receives both proceeds and interest, prorate each payment evenly, reporting only the portion of the payment that is interest.
  4. If the TP elected to receive payment over his life and:
  • lives beyond his life expectancy: continue to prorate
  • passes away sooner than life expectance: no deduction for unrecovered policy proceeds

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