When a loved one passes away, dealing with financial matters can be overwhelming. You may receive life insurance proceeds to help cover final expenses and provide financial security. But do you have to pay taxes on this payout? And will you receive a 1099 form for the proceeds?
Understanding the tax implications can help you use the life insurance funds appropriately. This guide examines whether life insurance payouts require a 1099, the tax rules, and what to do if you receive this form.
Overview of 1099 Forms
First, what exactly is a 1099 form?
A 1099 is an information return that reports various types of income to the IRS. There are several varieties covering different income sources:
- 1099-INT – Reports interest income
- 1099-DIV – Reports dividend income
- 1099-R – Reports distributions from retirement accounts
- 1099-MISC – Reports miscellaneous income
Financial institutions and other payers must issue you a 1099 by January 31 for the previous tax year if you received $600 or more from that source.
You will also receive a copy to reference when filing your tax return. The payer files the same information with the IRS, allowing them to verify you are reporting your 1099 income accurately.
Are Life Insurance Proceeds Reported on a 1099?
Life insurance death benefit payouts do not generate a 1099 form. The proceeds are generally not considered taxable income, so there is no requirement to report them to the IRS.
The Internal Revenue Code states that life insurance proceeds paid due to the death of the insured are excluded from the beneficiary’s gross income.
For example, if you receive a $100,000 life insurance payout when your spouse passes away, that amount is income tax-free and will not be reported on a 1099.
However, there are some exceptions where the proceeds could be taxable:
- If you receive proceeds in installments, any interest is taxable
- If the policy was sold for cash, the sale amount is taxable
- If the beneficiary is an estate, proceeds could increase estate taxes
In these scenarios, the insurance company would issue a 1099-INT or 1099-R to report the taxable income to the IRS. But the main death benefit amount remains untaxed.
When Do Life Insurance Proceeds Require a 1099?
If the life insurance payout is tax-free, why would the company ever issue a 1099? There are a few rare situations where proceeds do necessitate information reporting:
1. Installment payments
Rather than a lump sum, some beneficiaries choose to receive payments over time. This may be to avoid a large tax bill or for other planning purposes.
If the proceeds are paid in installments, the interest earned on the amounts held by the insurer before each payment is made would be taxable.
- Death benefit amount: $100,000
- Paid in 5 annual installments
- Each $20,000 payment would include interest accrued
The insurer would issue a 1099-INT reporting only the interest portion you must claim as income.
2. Beneficiary is an estate
If the life insurance beneficiary is the insured’s estate rather than a person, the payout could increase estate tax liability.
In this case, the executor may have to file an estate tax return and report a portion of the proceeds as taxable income. The insurer would provide a 1099 to help document that reportable amount.
3. Policy is sold for cash
If you sell or surrender a life insurance policy for cash, the money received from the sale would be taxable income. This includes policies you inherit as a beneficiary.
For example, you may decide to cash in the policy to pay expenses rather than keeping it in force. Or you might sell your rights as a beneficiary to someone else.
The insurer would issue a 1099-R to report the taxable income from selling or surrendering the life insurance contract.
Other Times You May Receive a 1099 for Life Insurance
Besides the death benefit payout, there are some other life insurance-related scenarios that could generate a 1099:
Withdrawals or distributions from a life settlement or viatical settlement agreement – Reported on 1099-R
Income from a life insurance policy you own on another person – Reported on 1099-INT or 1099-R
Earnings paid when you surrender a life insurance annuity – Reported on 1099-R
Accelerated death benefits paid if terminal or chronically ill – Reported on 1099-R
Always consult a tax advisor to understand if you need to claim any life insurance amounts you receive. Carefully review any 1099 forms to distinguish between taxable amounts and income you can exclude.
Do Beneficiaries Ever Owe Taxes on Life Insurance Payouts?
As noted, life insurance death benefits are typically not taxed. The beneficiary does not have to claim the proceeds as income. However, there are certain exceptions that could create a tax liability:
Estate as beneficiary
Naming your estate means the life insurance is included in your gross estate value. This increases the risk of owing estate taxes, which could take a significant cut of the policy payout. Estate taxes apply once estate values exceed $12.06 million.
Policy transfers for value
If you transfer a life insurance policy for cash or value consideration, the death benefit payout could be partly taxable. For example, if you sell your rights as a beneficiary to someone else, the sale amount would be taxable income reported on a 1099-R.
Cash value accumulation
With cash value life insurance policies, large premium payments can trigger a “modified endowment contract (MEC).” This results in cash value withdrawals becoming taxable income rather than tax-deferred savings. Complex tax guidelines apply to MEC life insurance policies.
Unless specific conditions apply, life insurance benefits are generally received income tax-free by beneficiaries within federal regulations. But state laws may also treat life insurance proceeds differently in terms of inheritance taxes.
Do Life Insurance Premiums Get Reported on a 1099?
The annual premiums you pay to keep a life insurance policy in force are not reported on information returns like a 1099.
Life insurance premiums also do not qualify as tax-deductible expenses for individuals in most cases. An exception is if you pay premiums on a policy owned by someone else, such as an ex-spouse under a divorce agreement.
For businesses that pay premiums on life insurance policies owned by the company, the premiums are deductible business expenses. However, information reporting is not required for the premium amounts.
A life insurance policy’s tax implications mainly occur upon receipt of any payouts or distributions, rather than when paying regular premium dues.
When Are Life Insurance Proceeds Taxable?
While lump-sum death benefits are not taxed, you might still owe taxes on other amounts paid out from a life insurance policy:
Cash value withdrawals – Taxable income if policy is a MEC
Accelerated death benefits – May be taxable if received before death
Interest payments – Interest accrued on proceeds paid in installments
Sale of policy or rights – Income received from selling policy or beneficiary rights
Annuity earnings – Taxable income when distributed from a life insurance annuity
Talk to a tax professional to understand if any taxable events apply to your particular life insurance situation. This will ensure you accurately report any necessary amounts on your tax return.
Filing Taxes on Life Insurance Income
If you do receive taxable income from a life insurance policy, here are some tips when filing your tax return:
Review any 1099 forms closely to identify taxable amounts
Make sure income amounts match what is reported to the IRS
Claim any taxable income on the appropriate lines and schedules
Life insurance interest is reported as ordinary income
Income from surrenders or sales goes on Schedule D as capital gains
Subtract any basis in the life insurance contract when determining taxable gains
If accelerated death benefits were paid, the exclusion ratio determines taxable portion
Keep records documenting your tax basis and any income received
Always consult a tax professional if you need assistance reporting taxable life insurance payouts correctly. This can reduce your risk of penalties for errors or underpayment.
Impact of Taxable Life Insurance Income
Any taxable income from your life insurance policy could impact your tax situation in a few ways:
Increased taxable income – Results in higher income taxes owed
Capital gains tax – Sale of policy may be subject to capital gains tax
Phaseouts of tax credits – Extra income can reduce eligibility for certain credits
Social Security taxation – Taxable income from life insurance could cause Social Security benefits to be taxed
Medicare surtax – May trigger the 3.8% net investment income tax if income limits are exceeded
**Tax bracket changes
Do You Pay Taxes On Life Insurance Proceeds?
Why did I get a 1099 for a life insurance payout?
Do I have to report life insurance payout to IRS?
Why did I get a 1099-R for life insurance?
Why did I get a 1099 INT for life insurance?