Many life insurance policies offer an accelerated death benefit rider, which allows you to access part of your death benefit while you’re alive if you’re diagnosed with a chronic or terminal illness. Early payout for chronic or terminal illness
This is called a “life insurance surrender,” and as long as your settlement amount is less than the total you paid in premiums, your surrender payout is tax-free. If you decide to discontinue your life insurance policy before it matures, you’re eligible to gain access to your accrued cash value minus any surrender fees. The cash value gains are not subject to any taxation unless the policy is surrendered or transferred to another owner - a scenario referred to as a life insurance settlement. If you choose a whole or universal life insurance policy, it builds cash value over time. In this case, the proceeds of the policy will be counted as part of your estate and may be subject to federal estate taxes. There’s one exception, and that’s when your estate is valued at more than $11.58 million - the IRS threshold for 2020. Fortunately, the death benefit isn’t considered taxable income, so the full payout will go to your beneficiaries. Most people buy life insurance so they can leave money to their beneficiaries when they die. Generally, your beneficiaries can dodge taxes in these situations. When are life insurance proceeds tax-free? There are a few situations where beneficiaries will have to pay tax - and they usually apply to permanent policies or policyholders with large estates. One of the main selling points of life insurance is that the proceeds are typically not taxable. This article was reviewed by Andrew Flueckiger, a member of the Finder Editorial Review Board and certified insurance counselor and licensed insurance agent in five states.