9. Is Life Insurance taxable?
Life insurance is included in a decedent’s gross estate (for estate tax purposes) if the decedent owned the policy. For example, if you are the Owner and the Insured on a life insurance policy that pays a death benefit of $500,000.00, and your son is the Beneficiary, the $500,000.00 will be included in your gross estate for purposes of federal and Illinois estate tax.
If your total taxable estate is less than the federal and Illinois exemption amounts in effect in the year of your death, then the life insurance will not be taxable. However, if your total taxable estate exceeds one or both exemption amounts, then your life insurance is, in effect, taxable, because it is included in the estate tax calculation. In either case, your son would not pay income tax on the insurance proceeds.