Fiction: Your beneficiaries won't have to pay income tax on the death benefits they receive from your life insurance policy.
Fact: Beneficiaries generally do not have to pay income tax on death benefits, with one exception. If the policy was transferred from one owner to another, it can trigger the transfer-for-value rule, which could negate the policy's tax-exempt status. This usually happens when a policy is transferred between stockholders to fund a buy-sell agreement.
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