Yes, the proceeds from exercising rights to receive life insurance distributions before death are generally taxable.
According to the retrieved information, Section 101(a)(1) of the Internal Revenue Code provides that gross income does not include amounts received under a life insurance contract if such amounts are paid by reason of the death of the insured. However, this exclusion does not apply to amounts received before the death of the insured.
Specifically, Section 101(g) addresses the treatment of certain accelerated death benefits, stating that amounts received under a life insurance contract on the life of an insured who is terminally or chronically ill are treated as amounts paid by reason of the death of the insured. This means that such amounts can be excluded from gross income.
However, if the life insurance distributions are not due to terminal or chronic illness, they do not fall under the exclusion provided by Section 101(g). Therefore, these proceeds would be included in gross income and are taxable.
Additionally, if a life insurance policy is surrendered for cash, any proceeds that exceed the cost of the policy must be included in income, as indicated in the retrieved information. This further supports the conclusion that life insurance distributions received before death are generally taxable unless specific exclusions apply, such as those for terminal or chronic illness.
Sources:
Rev. Rul. 2009-14
Rev. Rul. 2008-42
§ 101. Certain death benefits
Publication 525 (2023)
Rev. Rul. 2009-25
Rev. Rul. 63-76
