Is the death benefit from a life insurance policy that is part of my tax-deferred retirement plan payable to my beneficiaries free of income tax?
Many people choose a life insurance policy as one of the investments in their qualified retirement plan. If you’re among them, you should be aware of how the proceeds of the insurance policy will be taxed when you die. The proceeds in excess of the cash value will be tax-free. The cash value will be taxed as income in respect of a decedent. To illustrate, say the life insurance policy in your qualified plan has a $100,000 death benefit and the cash value is $25,000. When you die, your beneficiaries will receive $75,000 completely free of taxes. The remaining $25,000 will be subject to income tax.
