Remember, burial insurance is a type of life insurance, meaning the IRS treats the death benefit payment to your beneficiaries like any other type of life insurance.
In other words, life insurance payouts aren’t taxable, which means burial insurance proceeds aren’t either.
According to the IRS, proceeds from a final expense life insurance policy are not considered gross income, thus no taxes are due. Furthermore, since the payout money is not considered income, you don’t need to report the proceeds on your tax return.
The purpose of a final expense policy is peace of mind knowing that your family won’t be burdened by your funeral costs when you die. You can rest easy knowing the death benefit is paid out quickly and tax-free.
If taxes were due on a funeral insurance policy, you would need permission from the beneficiaries to be named as beneficiaries, and you would need their social security numbers. Because the policy won’t generate a tax burden, neither of those are required.
The proceeds from a burial policy are not taxable because the IRS does not consider the payout money gross income. When your beneficiaries file their taxes, they don’t no need to report the proceeds from the policy.
If you’re an individual taxpayer, funeral expenses are not tax-deductible, so you cannot list those costs as itemized deductions on your tax return. The only time funeral costs are tax-deductible is when the decedent’s taxable estate uses funds from the estate to pay for the burial expenses. In that circumstance, the requisite deductions must be listed on the federal estate tax return Form 706.
A life insurance beneficiary doesn’t need to do anything special to avoid taxes on a life insurance policy. By default, death benefit payouts from life insurance are tax-free. Life insurance generates a tax burden only when there are dividends (completely different than the death benefit) withdrawn greater than the premiums paid. Most types of life insurance don’t fall into this category, and again, the death benefit payout is always paid tax-free.