Is life insurance payout taxable?

In most cases, the death benefit paid to a beneficiary is not subject to federal income tax. However, there are exceptions: if the death benefit is paid to an estate rather than an individual, it may be subject to estate taxes if the estate exceeds federal exemption limits. Interest earned on a delayed lump sum can also be taxable. If you sell your policy through a life settlement, the proceeds may be partially taxable. Always consult a tax advisor for your specific situation.