Are SGLI Life Insurance Proceeds Taxed?

Servicemembers’ Group Life Insurance, commonly known as SGLI, is a group term life insurance program tailored for U.S. military members. Supervised by the Department of Veterans Affairs, this insurance is provided by a commercial insurer to offer a financial safety net. It was developed to ensure that servicemembers have access to low-cost life insurance, which might otherwise be difficult to obtain from private companies due to the inherent risks of military service.

Upon entering the military, servicemembers are automatically enrolled for the maximum coverage amount, which is currently $500,000. This coverage is a form of term life insurance that remains in effect throughout a member’s active duty and for a period of 120 days after separation from service. The program is designed to be straightforward, with premiums deducted directly from a servicemember’s pay.

Income Tax on Insurance Proceeds

The proceeds from an SGLI policy paid to a beneficiary upon a servicemember’s death are not subject to federal income tax. This tax treatment is consistent with the general rule for most life insurance death benefits under the U.S. tax code. The payout to beneficiaries is tax-free whether the cause of death was related to service or not.

This favorable tax treatment extends to related government-sponsored life insurance programs as well. Proceeds from Veterans’ Group Life Insurance (VGLI), which servicemembers can convert their SGLI to after leaving the military, are also exempt from federal income tax. Similarly, benefits from Family Servicemembers’ Group Life Insurance (FSGLI), which covers spouses and dependent children, are not taxable as income to the recipient.

The method of payment does not alter this tax-exempt status. Whether the beneficiary receives the insurance proceeds as a single lump sum or elects to receive the payment in installments over a period of time, the principal amount of the death benefit remains free from federal income tax.

Federal Estate Tax Considerations

While SGLI proceeds are free from income tax, they are generally included in the deceased servicemember’s gross estate for federal estate tax purposes. A gross estate includes the value of all assets and property the individual owned or had an interest in at the time of their death.

The federal government provides a substantial estate tax exemption, which is the amount an estate can be worth before any tax is due. For 2025, this exemption is $13.99 million per individual. This high threshold means that the vast majority of estates, including those of most servicemembers, will not owe any federal estate tax.

State-Level Tax Rules

The tax rules established at the federal level do not always mirror the laws in place at the state level. States have the authority to create their own tax systems, which can include an estate tax or an inheritance tax. A state-level estate tax is similar to the federal version but often has a much lower exemption amount, meaning smaller estates could be subject to tax.

An inheritance tax is a different type of tax that is levied on the beneficiaries, or heirs, who receive the assets from an estate. The tax is paid by the person receiving the property, and the rate can vary depending on their relationship to the deceased. Only a handful of states impose an inheritance tax.

The specific treatment of SGLI proceeds varies from one state to another. Some states may follow the federal government’s lead and exempt the proceeds, while others might include them in their estate or inheritance tax calculations. Due to this variability, it is advisable to consult with a local tax professional or the state’s specific department of revenue for accurate guidance.

Tax Deductibility of Premiums

The premiums paid for SGLI coverage are not tax-deductible on a federal income tax return. These payments are considered a personal expense by the Internal Revenue Service (IRS).