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Taxes on Life Insurance guides
1035 exchanges: swapping policies without taxSection 1035 lets you swap a life policy for another policy or an annuity without taxing the gain. What qualifies, what you can lose and how to do one right.Estate liquidity: paying taxes and debts without a fire saleWhy estates rich in property but short on cash are forced to sell, what bills come due after a death, and how life insurance and other tools supply the cash.Gift tax and life insurance premiumsWhen paying premiums or transferring a policy is a gift, how the 2026 $19,000 annual exclusion and $15 million exemption apply, and when to file Form 709.The Goodman triangle: an expensive ownership mistakeWhat happens when the owner, insured and beneficiary of a life policy are three different people: a possible gift of the full death benefit, and how to fix it.How cash value is taxed: withdrawals, loans and surrendersCash value grows tax-deferred. Withdrawals are tax-free up to your premiums paid, loans usually are not income, and a surrender above basis is taxable income.Group life over $50,000 and imputed incomeEmployer group term life above $50,000 creates taxable imputed income. How the IRS Table I math works for 2026, a worked example, and what appears on your W-2.Irrevocable life insurance trusts (ILITs)An ILIT owns your policy so the death benefit stays out of your taxable estate. How it works, Crummey gifts, the three-year rule, costs and who needs one.Is life insurance taxable?Death benefits are usually free of federal income tax, but interest, estate tax, policy sales, cash value gains and some transfers can create a tax bill.Life insurance and the federal estate taxDeath benefits are included in your taxable estate if you own the policy or it pays your estate (IRC §2042). How the 2026 $15 million exemption applies.Life insurance and your willYour will does not decide who gets your life insurance; the beneficiary form does. How the two interact, where they conflict, and a checklist to align them.Using life insurance in an estate planThe jobs life insurance does in an estate plan, from income replacement to paying estate taxes, and the ownership choices that decide whether it helps.Modified endowment contracts and the 7-pay testA policy funded too fast becomes a MEC under IRC §7702A: loans and withdrawals are taxed gain-first, with a possible 10% penalty. How the 7-pay test works.State estate and inheritance taxes and life insuranceWhich states tax estates or inheritances in 2026, with thresholds, sources and as-of dates, and how life insurance you own can push an estate over a state line.The three-year rule for transferring a policyGive away a life insurance policy and die within three years, and IRC §2035 pulls the death benefit back into your taxable estate. How to plan around it.The transfer-for-value ruleSelling a life insurance policy can make most of its death benefit taxable under IRC §101(a)(2). What counts as a transfer, the exceptions and the traps.