Is the life insurance death benefit taxable in Nevada?

Life insurance death benefits are generally received income-tax-free by beneficiaries under federal law (IRC Section 101). Nevada's lack of a state income tax means there is also no state tax on the receipt of a death benefit—Nevada beneficiaries receive the full amount free from both federal income tax and Nevada state tax.

However, there are situations where portions of a death benefit may be taxable. If the policy was sold to a third party (a life settlement or viatical settlement), proceeds above certain amounts may be taxable. If the policy was purchased as part of a business transfer that doesn't qualify for an exception, the death benefit may be partially taxable (transfer-for-value rules).

For estate tax purposes, the death benefit may be included in the deceased's taxable estate if they owned the policy at death. For estates approaching federal thresholds, this inclusion can trigger estate taxes. Properly structured ILITs remove the death benefit from the taxable estate.

Interest accrued on death benefit proceeds that are held by the carrier under a retained asset account option (rather than paid immediately as a lump sum) is taxable as ordinary income in the year earned. Opting for immediate lump-sum payment avoids this interest income issue.