Does The IRS Tax Life Insurance? 
The IRS does not tax most life insurance with income tax . If a cash value policy is a Modified Endowment Contract , the cash value is taxed . And if there is interest paid to a beneficiary because they are receiving their life insurance proceeds on a payment plan , the interest is taxed . Also , money left to the estate is taxed . But as a general rule , if money is life to a person as beneficiary , that person does not pay income tax on the life insurance received . Estate taxes do apply to life insurance , if the amount of the estate is above the exempted amount . 