Life Insurance Proceeds: Taxable and Nontaxable Income (2025 IRS Guide)
This guide covers “Life Insurance Proceeds” within taxable and nontaxable income. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.
Adapted from Publication 525 (2025), Taxable and Nontaxable Income, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.
Context for these rules
This section discusses various types of income. You may have taxable income from certain transactions even if no money changes hands. For example, you may have taxable income if you lend money at a below-market interest rate or have a debt you owe canceled.
Life Insurance Proceeds
Life insurance proceeds paid to you because of the death of the insured person generally aren’t taxable unless the policy was turned over to you for a price or was acquired in a reportable policy sale. This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract issued on or before December 31, 1984. However, interest income received as a result of life insurance proceeds may be taxable.
Proceeds not received in installments.
If death benefits are paid to you in a lump sum or other than at regular intervals, include in your income only the benefits that are more than the amount payable to you at the time of the insured person’s death. If the benefit payable at death isn’t specified, you include in your income the benefit payments that are more than the present value of the payments at the time of death.
Proceeds received in installments.
If you receive life insurance proceeds in installments, you can exclude part of each installment from your income.
To determine the excluded part, divide the amount held by the insurance company (generally, the total lump sum payable at the death of the insured person) by the number of installments to be paid. Include anything over this excluded part in your income as interest.
Example 25.
The face amount of the policy is $75,000 and, as beneficiary, you choose to receive 120 monthly installments of $1,000 each. The excluded part of each installment is $625 ($75,000 ÷ 120), or $7,500 for an entire year. The rest of each payment, $375 a month (or $4,500 for an entire year), is interest income to you.
Installments for life.
If, as the beneficiary under an insurance contract, you’re entitled to receive the proceeds in installments for the rest of your life without a refund or period-certain guarantee, you figure the excluded part of each installment by dividing the amount held by the insurance company by your life expectancy. If there is a refund or period-certain guarantee, the amount held by the insurance company for this purpose is reduced by the actuarial value of the guarantee.
Surviving spouse.
If your spouse died before October 23, 1986, and insurance proceeds paid to you because of the death of your spouse are received in installments, you can exclude up to $1,000 a year of the interest included in the installments. If you remarry, you can continue to take the exclusion.
Employer-owned life insurance contract.
If you’re the policyholder of an employer-owned life insurance contract, you must include in income any life insurance proceeds received that are more than the premiums and any other amounts you paid on the policy. You’re subject to this rule if you have a trade or business, you own a life insurance contract on the life of your employee, and you (or a related person) are a beneficiary under the contract.
However, you may exclude the full amount of the life insurance proceeds if the following apply.
-
Before the policy is issued, you provide written notice about the insurance to the employee and the employee provides written consent to be insured.
-
Either:
-
The employee was your employee within the 12-month period before death, or, at the time the contract was issued, was a director or highly compensated employee; or
-
The amount is paid to the family or designated beneficiary of the employee.
-
Interest option on insurance.
If an insurance company pays you interest only on proceeds from life insurance left on deposit, the interest you’re paid is taxable.
If your spouse died before October 23, 1986, and you chose to receive only the interest from your insurance proceeds, the $1,000 interest exclusion for a surviving spouse doesn’t apply. If you later decide to receive the proceeds from the policy in installments, you can take the interest exclusion from the time you begin to receive the installments.
Surrender of policy for cash.
If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. In most cases, your cost (or investment in the contract) is the total of premiums that you paid for the life insurance policy, less any refunded premiums, rebates, dividends, or unrepaid loans that weren’t included in your income.
You should receive a Form 1099-R showing the total proceeds and the taxable part. Report these amounts on lines 5a and 5b of Form 1040 or 1040-SR.
Tip:
For information on when the proceeds are excluded from income, see Accelerated Death Benefits, later.
Split-dollar life insurance.
In most cases, a split-dollar life insurance arrangement is an arrangement between an owner and a nonowner of a life insurance contract under which either party to the arrangement pays all or part of the premiums, and one of the parties paying the premiums is entitled to recover all or part of those premiums from the proceeds of the contract. There are two mutually exclusive rules to tax split-dollar life insurance arrangements.
-
Under the economic benefit rule, the owner of the life insurance contract is treated as providing current life insurance protection and other taxable economic benefits to the nonowner of the contract.
-
Under the loan rule, the nonowner of the life insurance contract is treated as loaning premium payments to the owner of the contract.
Endowment Contract Proceeds
An endowment contract is a policy under which you’re paid a specified amount of money on a certain date unless you die before that date, in which case the money is paid to your designated beneficiary. Endowment proceeds paid in a lump sum to you at maturity are taxable only if the proceeds are more than the cost (investment in the contract) of the policy. To determine your cost, subtract any amount that you previously received under the contract and excluded from your income from the total premiums (or other consideration) paid for the contract. Include the part of the lump payment that is more than your cost in your income.
Endowment proceeds that you choose to receive in installments instead of a lump sum payment at the maturity of the policy are taxed as an annuity. This is explained in Pub. 575. For this treatment to apply, you must choose to receive the proceeds in installments before receiving any part of the lump sum. This election must be made within 60 days after the lump-sum payment first becomes payable to you.
Accelerated Death Benefits
Certain amounts paid as accelerated death benefits under a life insurance contract or viatical settlement before the insured’s death are excluded from income if the insured is terminally or chronically ill.
Viatical settlement.
This is the sale or assignment of any part of the death benefit under a life insurance contract to a viatical settlement provider. A viatical settlement provider is a person who regularly engages in the business of buying or taking assignment of life insurance contracts on the lives of insured individuals who are terminally or chronically ill and who meets the requirements of section 101(g)(2)(B) of the Internal Revenue Code.
Exclusion for terminal illness.
Accelerated death benefits are fully excludable if the insured is a terminally ill individual. This is a person who has been certified by a physician as having an illness or physical condition that can reasonably be expected to result in death within 24 months from the date of the certification.
Exclusion for chronic illness.
If the insured is a chronically ill individual who isn’t terminally ill, accelerated death benefits paid on the basis of costs incurred for qualified long-term care services are fully excludable. Accelerated death benefits paid on a per diem or other periodic basis are excludable up to a limit. For 2025, this limit is $420. It applies to the total of the accelerated death benefits and any periodic payments received from long-term care insurance contracts. For information on the limit and the definitions of “chronically ill individual,” “qualified long-term care services,” and “long-term care insurance contracts,” see Long-Term Care Insurance Contracts under Sickness and Injury Benefits, earlier.
Exception.
The exclusion doesn’t apply to any amount paid to a person (other than the insured) who has an insurable interest in the life of the insured because the insured:
-
Is a director, officer, or employee of the person; or
-
Has a financial interest in the person’s business.
Form 8853.
To claim an exclusion for accelerated death benefits made on a per diem or other periodic basis, you must file Form 8853 with your return. You don’t have to file Form 8853 to exclude accelerated death benefits paid on the basis of actual expenses incurred.
Using the guidance
Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.
Sources and further reading
- Publication 525 (2025), Taxable and Nontaxable Income: Miscellaneous Income — Life Insurance Proceeds — Internal Revenue Service; 2025 edition.
The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.