901: Friday Q&A: Why You Should Maximize Tax-Deferred Plans, UTMA Accounts, Dividends on Whole Life, Asset Allocation, Business, Etc.
Radical Personal Finance
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Life Insurance Death Benefit Proceeds Are Income Tax Free
Life insurance proceeds can often be subject to estate taxes, but life insurance death benefit proceeds are received income tax free by the beneficiary. The seven pay test is that there is a ratio between premium payments to the contract as compared to the total death benefit of the contract. You can't put in more premium payments than will work with a certain ratio to the death benefit. So you have to buy a big enough insurance policy for this actually to be life insurance and not to be a tax shelter.
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