How are life insurance proceeds taxed when my heirs receive them?

For the people who receive them, life insurance death benefits are generally income-tax-free – your beneficiaries get the full payout with no federal income tax owed. That's one reason term life insurance is such an efficient way to protect a family. There are two wrinkles. First, if the beneficiaries leave the money with the insurer and earn interest, that interest is taxable. Second, although the proceeds are income-tax-free, they can still be counted in your taxable estate for estate tax purposes if you owned the policy – an issue only for estates above the exemption (about $13.99 million in 2025), which is where an irrevocable life insurance trust comes in. Also make sure to name living beneficiaries; if the proceeds default to your estate, they can get tangled in probate. For most families, life insurance simply delivers tax-free cash exactly when it's needed. See wealthserene.com/tools/insurance-calculator.