Reader’s Question:

Are life insurance taxable in New York? Apparently, my mother in law says that the IRS is claiming she has to pay taxes for the 50,000 life insurance that she received when my father in law passed away.

Lorie

New York, NY

Hello there, Lorie!

No, life insurance are not taxable in New York. Your mother in law was probably mistaken by thinking that was your father in laws life insurance. Though, I should also mention that there are a few exceptions to this. IRS can impose tax if it was considered a form of investment in disguise. The ‘tax’ she is talking about will probably be an estate tax. In this case then, the death benefit which was given to your mother in law gets added to the value of the estate of your father in law. Or, maybe it became taxable under the State inheritance taxes. Now, another angle is that the life insurance becomes taxable as the income of the holder if the life policy has the feature that enables the policy holder to withdraw a potion of the cash values gained by the policy.

But technically speaking, life insurance death benefit proceeds are always tax free if it is paid to a natural person. It will become taxable only if there was a collateral assignment on the policy to secure a loan. Like if you want to loan $1 million from a bank, the bank would want a collateral, which can be a part of your life insurance policy in case you die before the loan is paid.