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IRS.gov Website
Publication 17
taxmap/pub17/p17-065.htm#en_us_publink1000171970

Life Insurance Proceeds(p89)

rule
Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract. However, interest income received as a result of life insurance proceeds may be taxable.
taxmap/pub17/p17-065.htm#en_us_publink1000171971

Proceeds not received in installments.(p89)

rule
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 is not specified, you include in your income the benefit payments that are more than the present value of the payments at the time of death.
taxmap/pub17/p17-065.htm#en_us_publink1000171972

Proceeds received in installments.(p89)

rule
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.
taxmap/pub17/p17-065.htm#en_us_publink1000171973
Surviving spouse.(p89)
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.
taxmap/pub17/p17-065.htm#en_us_publink1000171975

Surrender of policy for cash.(p89)

rule
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 were not included in your income.
You should receive a Form 1099-R showing the total proceeds and the taxable part. Report these amounts on lines 16a and 16b of Form 1040 or lines 12a and 12b of Form 1040A.
taxmap/pub17/p17-065.htm#en_us_publink1000236674

More information. (p89)

rule
For more information, see Life Insurance Proceeds in Publication 525.
taxmap/pub17/p17-065.htm#en_us_publink1000171976

Endowment Contract Proceeds(p89)

rule
An endowment contract is a policy under which you are 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 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 sum payment that is more than your cost in your income.
taxmap/pub17/p17-065.htm#en_us_publink1000171977

Accelerated Death Benefits(p90)

rule
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.
taxmap/pub17/p17-065.htm#en_us_publink1000171978

Viatical settlement.(p90)

rule
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.
taxmap/pub17/p17-065.htm#en_us_publink1000171979

Exclusion for terminal illness.(p90)

rule
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.
taxmap/pub17/p17-065.htm#en_us_publink1000171980

Exclusion for chronic illness.(p90)

rule
If the insured is a chronically ill individual who is not 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. This limit 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 in Publication 525.
taxmap/pub17/p17-065.htm#en_us_publink1000171981

Exception.(p90)

rule
The exclusion does not 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:
taxmap/pub17/p17-065.htm#en_us_publink1000171982

Form 8853.(p90)

rule
To claim an exclusion for accelerated death benefits made on a per diem or other periodic basis, you must file Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, with your return. You do not have to file Form 8853 to exclude accelerated death benefits paid on the basis of actual expenses incurred.
taxmap/pub17/p17-065.htm#en_us_publink1000171983

Public Safety Officer Killed in the Line of Duty(p90)

rule
If you are a survivor of a public safety officer who was killed in the line of duty, you may be able to exclude from income certain amounts you receive.
For this purpose, the term public safety officer includes law enforcement officers, firefighters, chaplains, and rescue squad and ambulance crew members. For more information, see Publication 559, Survivors, Executors, and Administrators.