What happens if someone dies while an active plan participant?
Life Insurance: The beneficiary receives the difference between the cash value (CV) and the total death benefit income tax free. The CV, minus the taxes paid for the “current economic benefit” is taxed as ordinary income. For example: Assume that the death benefit is equal to $500,000 The cash value is equal to $100,000 $400,000 is received income tax free $100,000 is taxed as ordinary income Annuity: The annuity is surrendered and the surrender value is paid to the beneficiary. This amount will be income taxable.
