Life insurance proceeds received after the death of the insured are not subject to income tax. However, many people surrender their policies for cash surrender value or sell them in the life settlement market. Both of these types of transactions are taxable events for income tax purposes.
See our website page on life insurance for more details on the tax rules for these transactions. The tax treatment differs for whole life versus term life, whether it is sold or surrendered, and also whether the insured individual is terminally/chronically ill.
You do have cost basis in the life insurance contract which you can use to reduce your taxable gain. Click on the image of the life insurance calculator to the right for help in calculating your taxable gain and after-tax sales proceeds.
Know what your after-tax sales proceeds will be before you make a decision to sell or surrender your policy.