Life Insurance

Taxation of Life Insurance

For Federal Income Tax purposes, life insurance death benefits are usually tax free under the Internal Revenue Code Section 101(a)(1).  However, in some instances, some portion of the life insurance can be taxable.  For example, if a life insurance policy is transferred for valuable consideration under IRC 101(a)(2), the life insurance proceeds may be taxable.  Also, insurance can become taxable where an insurable interest was lacking based on Utah Code Annotated 31A-21-104.  Employers and business owners should be aware of additional tax rules for employer-owned insurance under 101(j).

Request Information from a Carrier

Working with insurance carriers can be difficult unless the carrier has clear information evidencing the authority of the executor or trustee.  In many cases, the insurer will request that you provide then with information about the Executor's authority.

Distributing Insurance Proceeds

Once collected, insurance proceeds, like any asset of the estate, can be distributed.  However, as best practice, distributions of assets should only be made after receiving a receipt and release of liability.  Otherwise, after receiving distributions, a beneficiary has a lower incentive to provide receipt and release to the executor.  This can leave the executor feeling vulnerable.