No, a death benefit is not taxable. You will, however, still want to report it, but not with your gross income.
What is a Death Benefit?
A death benefit is the purpose of your life insurance policy—when you, the policyholder, pass away, a predetermined amount of money, known as the death benefit, is passed on to your beneficiaries. For final expense, this death benefit will be anywhere from $2,000 to $50,000.
What, then, is a beneficiary? This is a person (or multiple people) who you choose to receive the death benefit when you (the policyholder) pass away. Once these funds are issued, it will be up to them to use the money as you intended.
What Does the Final Expense Death Benefit Look Like?
How can you designate your death benefit to be used? Well, you have a few options.
The most common use of a final expense policy is to cover your funeral costs. Today, funerals cost anywhere from $5,000 to more than $10,000 depending on your chosen arrangements—that is a lot for you or your loved ones to cover out-of-pocket, and final expense can cover all of it ahead of time.
You can also cover other small expenses that fit within your policy. This can include estate taxes, medical bills, credit card payments, and anything else you choose.
Why Death Benefits Are Not Taxable
With all of this in mind, why are death benefits non-taxable? Well, for the beneficiary, it’s not really income for their own use. You will not see the payout, because it’s only issued once the policyholder (you) passes away.
For the beneficiary, especially a beneficiary of a final expense policy, they will likely receive little to none of the death benefit for their own personal use. They are instead going to use it to cover the policyholder’s designated expenses—it is, therefore, not taxed.
You Should Still Report On It
Just because life insurance payouts are non-taxable does not mean that you can avoid reporting it. The IRS explains that you should report it under topic number 403, a section designated to taxable, nontaxable, and excludable interest.
It is the beneficiary’s responsibility to include this in their tax report, not the policyholder. As long as it is reported properly, the beneficiary will be able to use it as the policyholder had intended.
Naming a Viable Beneficiary Matters
Be sure, however, to name a beneficiary that will be able to file the death benefit as nontaxable. Minors will have to be placed into a trust to receive the funds, which may be subject to taxation. Also, those with a disability may experience issues with their Social Security disability benefits because the death benefit may be considered part of their income.
As long as you name a viable, trustworthy beneficiary and explain the necessary tax reporting, your death benefit will be passed along tax-free. If you are the beneficiary, make sure to discuss these details with the final expense policyholder who named you.
Call Final Expense Direct Today
You and your loved ones financial security is made easy with Final Expense Direct. We will walk you through the insurance process and make sure everything is in proper order. To learn more, give us a call today at 1-877-674-0236.