Are Life Insurance Proceeds Tax Free?
Yes and no. Life insurance proceeds are not subject to the beneficiaries’ income tax, but they are subject to the estate tax if the insured owns the policy in his or her own name. One of the most effective ways to ensure that the proceeds of your life insurance policy are not subject to the estate tax is to set up an irrevocable life insurance trust (ILIT) to own the policy. So long as the trust is properly structured, the policy will not be included in your gross estate.