Is SGLI Taxable? Income, Estate, and State Tax Rules
Learn the key distinction in how SGLI is taxed. Proceeds are not treated as income for a beneficiary, but they are included in a gross estate.
A common question for beneficiaries of Servicemembers’ Group Life Insurance (SGLI) is whether the proceeds are subject to taxes. Understanding the tax implications is important for managing these funds. This article clarifies the federal income, federal estate, and state-level tax rules associated with SGLI benefits.
Federal Income Tax Treatment of SGLI
The death benefit from an SGLI policy paid to a beneficiary is not considered gross income and is not subject to federal income tax. This rule applies whether the beneficiary receives the payout as a single lump sum or in 36 equal monthly installments. If the installment option is chosen, the interest earned on the proceeds is also exempt from federal income taxation.
This income tax exemption extends to related life insurance programs. Benefits from Veterans’ Group Life Insurance (VGLI) and Family SGLI (FSGLI) are also excluded from the beneficiary’s gross income for federal tax purposes. This ensures that families of servicemembers and veterans receive the full intended benefit.
While the death benefit itself is tax-free, the premiums paid for the coverage by the servicemember are not tax-deductible. These premiums are treated as a personal expense. Therefore, a servicemember cannot deduct the monthly premium payments from their taxable income.
SGLI and Federal Estate Tax
A distinction exists between income tax and federal estate tax. While SGLI proceeds are free from income tax for the beneficiary, their value is included in the deceased servicemember’s gross estate. A gross estate is the total value of all assets a person owns at death, including cash, real estate, investments, and life insurance policies like SGLI.
The inclusion of SGLI proceeds in the gross estate does not automatically trigger a tax liability. Federal estate tax is only levied on estates that exceed a specific exemption threshold. For 2025, this federal exemption is $13.99 million per individual, and an estate valued below this amount will not owe any federal estate tax.
Because of this high exemption amount, the vast majority of servicemembers’ estates will not be subject to federal estate tax. For an estate to be taxable, the SGLI benefit and all other assets would need to surpass this threshold. For example, if a servicemember had the maximum $500,000 SGLI policy and other assets totaling $1 million, their total estate of $1.5 million would be well below the federal exemption, resulting in no federal estate tax.
State Tax Considerations
Beneficiaries must also consider potential tax implications at the state level. Most states align with federal policy and do not impose an income tax on life insurance death benefits, including those from SGLI. This means the beneficiary typically receives the full amount without it being counted as taxable income on their state return.
The more relevant issue at the state level is the potential for estate or inheritance taxes. A number of states impose their own estate tax, and their exemption amounts are often substantially lower than the federal government’s. An estate that is not large enough to trigger federal estate tax could still be subject to state estate tax.
Furthermore, a few states levy an inheritance tax, which is paid by the beneficiary rather than the estate. The tax rate and exemptions for inheritance tax often depend on the beneficiary’s relationship to the deceased, with closer relatives like spouses and children typically facing lower rates or full exemptions. Beneficiaries should review the specific laws of the servicemember’s legal state of residence to determine if any state-level tax liability exists.