Is Final Expense Insurance Taxable Income for Beneficiaries? No!!

No, final expense insurance proceeds are not taxable income for beneficiaries. According to the IRS, life insurance death benefits are classified as an indemnity payout. This means they are exempt from federal and state income tax meaning final expense life insurance is 100% tax free to your beneficiary. Beneficiaries do not need to report the proceeds on their state or federal income tax returns. In this article we will explain how the IRS views a final expense payout, whether it needs to be reported, any situations where final expense is taxable and how a family can actually use a final expense payout.

What Does the IRS Say About Final Expense Payouts?

The IRS views life insurance death benefits as an indemnity payout. This means it is not viewed as earned or unearned income therefore it is not subject to being taxed. That also includes the cash value of your final expense policy as well. All final expense policies accumulate cash value as you pay your premiums.

So your policy builds extra money on top of its death benefit that is also tax free. When we speak with our clients here at our agency part of our presentation is mentioning how the final expense life insurance policies we sell are tax free to your beneficiary when you die.

So when your family is grieving you and going through a tough time they do not have to worry about a tax bill on the proceeds.

You may also want to learn more about Does Burial Insurance work out of State?

Do Beneficiaries Need to Report a Burial Insurance Payout?

Your beneficiaries do not have to report the burial insurance payout. They will not receive a form 1099 to fill out at the end of the year. Your family’s income tax bracket will not change either. They just take the money you left them and use it for your burial and end of life expenses.

Any money leftover is theirs to keep and do as they see fit.

Are There Any Situations Where Final Expense Becomes Taxable?

While final expense insurance may not be taxable income for beneficiaries there is one exception. That is the interest on the final expense payout if the insurance company holds the payout for a period of time. The interest that accumulates when an insurance company holds the payout is considered taxable income.

Do not confuse this with the cash value of the policy.

• Cash value: 100% tax-free death benefit
• Interest earned while the insurance company is holding the payout funds: Taxable income

They are two completely different things. When you die the insurance company owes your beneficiary the face value of the policy. There is always a certain amount of time between the insurance company being notified of the death and when they payout the money.

If the company holds on to the payout for an extended amount of time or your beneficiary chooses to be paid in installments. This delays the full payout and as that money is held it generates interest which is then subject to being taxed.

Example:

If a final expense policy is worth $10,000, that $10,000 payout is tax-free benefits. Now if the insurance company holds your beneficiary’s money for awhile or your beneficiary says they want a gradual payout over 5 years. If it earns $200 in interest during that time then the $200 of interest is what gets reported. The insurance company will typically issue a 1099 for the interest only.

How Families Actually Use Final Expense Payouts

Since final expense insurance is not taxable income for beneficiaries your family can use all of it. They can use it for your funeral and any other end of life expenses. Since these plans payout in cash your family can use this money for the following:

• Caskets
• Funeral service
• Outstanding medical bills or debts
• Head stones
• Transporting the body
• Memorial services

Read our article on Using Final Expense Insurance for Out of State Burial & Transport

We help families every day secure burial insurance to give their loved ones peace of mind. Our agents can help you too, use our quote form to the right of this page to check pricing and speak with an agent. You can also call us directly using our number at the top of this page.

Our process is quick and easy it only takes 10 – 20 minutes to secure coverage for your family today!