1. Money

What Happens to Life Insurance When the Insured Dies?

Income Tax, Estate Tax, and Other Consequences

By

If your loved one has died and you're the beneficiary of a life insurance policy, then you can collect the insurance proceeds by mailing the decedent's original death certificate and the original life insurance policy to the insurance company. But once you've collected the proceeds, you'll need to understand the tax and other consequences of inheriting the life insurance.

Income Tax Consequences

As the beneficiary of a life insurance policy, you will inherit the proceeds free and clear of any income tax consequences to you.

Estate and Inheritance Tax Consequences

If the insured's estate is subject to federal or state estate or inheritance taxes and the insured had a Last Will and Testament or Revocable Living Trust, then provisions contained in the Last Will or Living Trust will dictate whether or not you'll be required to contribute to the payment of the estate or inheritance tax bill.

If the insured's estate is subject to federal or state estate or inheritance taxes and the insured didn't have a Last Will and Testament or Revocable Living Trust, then the laws of the state where the insured died will dictate whether or not you'll be required to contribute to the payment of the estate or inheritance tax bill.

Do You Have to Pay Any of the Insured's Final Bills?

A common question that comes up when the insured of a life insurance policy dies owing a significant amount of debt is whether the beneficiary will be required to use any of the insurance proceeds to pay off the outstanding debt. The answer is NO.

©2014 About.com. All rights reserved.