Life Insurance - How To Avoid The Federal Estate Tax When Collecting Life Insurance Proceeds

I read an informative MarketWatch article by Bill Bischoff regarding how to avoid the federal estate tax when collecting life insurance proceeds and thought I’d share.

A few of the important take-aways from the article are listed below. However I recommend you read the entire article by clicking the web link below.

  • In general, a policy beneficiary can receive life insurance death benefit payments free of any federal income tax (and usually free of any state income tax too).1
  • Under the current rules, when you are considered to own a policy on your own life, the death benefit is included in your taxable estate - unless the money goes to your surviving spouse and he or she is a U.S. citizen. When death benefits go directly or indirectly to a non-spouse beneficiary, such as a child or sibling, without passing through your estate, the money is still included in your taxable estate.1
  • If the value of your estate - including any included life insurance death benefits that go to someone other than your surviving spouse - exceeds the federal estate tax exemption of: (1) $5.49 million if you’re unmarried or (2) a combined $10.98 million for you and your spouse if you’re married, your heirs will stand in line behind the IRS (and possibly the state death tax collector too). For unmarried folks, having lots of life insurance coverage (often through work) is the most common cause of exposure to the federal estate tax or state death taxes. The larger $10.98 million federal estate tax exemption for married couples makes it less likely that life insurance coverage will trigger a federal estate tax bill. But it can still happen.1 

Click on web link below to read entire article for the rest of the tips, etc.:

1. Source: MarketWatch article by Bill Bischoff (

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