Tax Treatment of Growth and Death Benefits
Fiscal Implications for Beneficiaries and Estates
From a tax perspective, Preneed Funeral Insurance is generally structured so that the growth in the policy’s value is not taxable to the individual during their lifetime. Because the policy is a life insurance contract, the death benefit is usually paid out income-tax-free under Internal Revenue Code Section 101(a).
However, in cases where the funds are held in a "Preneed Trust" rather than an insurance policy, the tax treatment differs. In a trust, the "grantor" (the purchaser) may be responsible for paying taxes on the annual interest earned, unless the trust is structured as a "Qualified Funeral Trust" (QFT) under Section 685. This document compares the tax efficiencies of insurance-funded vs. trust-funded preplanning.
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