What benefits payable at death are included in the term “life insurance” for estate tax purposes?
IRC Section 2042 deals with the estate taxation of proceeds from insurance on the life of a decedent. According to this code section and regulations, the term “insurance,” means life insurance of every description. In the case of a retirement income endowment, the death proceeds are treated as insurance proceeds if the insured dies before the terminal reserve value equals or exceeds the face value. If the insured dies after that time, the proceeds are treated as death proceeds of an annuity contract.
With respect to the proceeds of “no-fault” automobile liability insurance, the IRS has ruled on three categories of benefits:
(1) Survivors’ loss benefits. These are benefits payable only to certain named dependent survivors of the insured. If the insured dies leaving no such eligible dependents, no benefits are paid. The value of any such benefit is not includable in the insured’s gross estate under IRC Section 2033 (defines what is includible in the gross estate) or under IRC Section 2042(2) because if the proceeds are life insurance and the insured would not any incidents of ownership at death.
(2) Basic economic loss benefit. This benefit covers the insured’s medical expenses and loss of income arising from the insured’s injury while operating an automobile. The value of this benefit is includable in the insured’s gross estate under IRC Section 2033, but not under IRC Section 2042(1) (life insurance proceeds payable to or for the insured’s estate).
(3) Death benefit. This is a benefit payable unconditionally to the estate of the insured and to the estate of any passenger in the insured’s car killed in a covered accident. The value of this benefit is includable in the estate of each insured receiving the benefit.
When are death proceeds of life insurance includable in an insured’s gross estate?
They are includable in the following four situations:
(1) The proceeds are payable to the insured’s estate, or are receivable for the benefit of the insured’s estate;