Student Question from Krishna
Course: Insurance Planning

Student Question:

I think I’m missing something w/this concept. I don’t understand how life insurance proceeds would be taxable to the owner’s estate when the beneficiary is someone else? Example: If I am the policy owner and I purchase life insurance on myself and name my sister as the beneficiary, wouldn’t the proceeds of that policy be paid to the sister tax-free at the time of my death? So, how would the proceeds of this policy be considered part of my taxable estate when paid to someone else? Assistance appreciated!

Instructor Response:

Hi Krishna-

Great questions here and you’re going to learn a lot more about this when we get to estate planning but essentially, the reason it’s still taxable to the estate is because the deceased is considered to own the policy. The beneficiary has no bearing here. So, in your example, if you have a policy on yourself and YOU are making the premium payments, and YOU have the ability to change that beneficiary from your sister to anyone else, then YOU are the OWNER of that policy.  And as long as YOU own the policy, at your death, the death benefit is considered your asset.  You had control over who that death benefit went to so it’s your money that you are giving to your sister.  At least in the eyes of the tax law.

And keep in mind, we’re talking about the estate tax here. There will not be an income tax due for the beneficiary or anyone else.

Does that help to clarify?  Please let me know.