Does The Government Tax Life Insurance? 
If the owner and insured person of a life insurance policy passes away , and has no surviving spouse , the death benefit of the policy will be added to the value of his/her estate . If this total exceeds state or federal estate tax exemptions , the excess would incur estate taxes . As of now , only 21 states have state estate and/or inheritance taxes . The exemption for federal estate taxes in 2013 is $ 5,250,000 . So the government taxes relatively few policies with estate taxes . Life insurance is not subject to income tax , except in some cash policy situations . If someone collects their life insurance proceeds periodically rather than in a lump sum , they will be paid interest on the as-yet-unpaid amount , and the interest is taxed . Generally speaking , the tax benefits of life insurance is one of the features that make is so desirable . 