Accidental Death Insurance Basics

• Accidental death insurance is usually a term life policy that covers somebody in case of an accidental death as defined under the policy. Because accidents are rarely health-related, individuals with disqualifying illnesses can often qualify for this kind of coverage even when denied other life insurance. If the insured dies from an accident while covered, the payout process and tax implications are identical to other life insurance policies.
  
  

Employee Benefit Basics

• Employee benefits are any non-cash rewards an employer gives workers in exchange for their work. Health insurance is one of the most common and well-known examples of employee benefits. Unless the benefit involves a cash payment -- such as a pension or health savings account -- benefits are almost never subject to taxation.
  
  

Taxability

• Accidental death insurance benefits are not a cash payment from the employer to the employee. Rather, the employer pays for a non-cash benefit that might result in cash later on. Under federal tax law, payouts from accidental death policies are not taxable. Tax laws are complex and change frequently, however, so it is usually worth checking with your accountant -- or at least the insurance agent -- before making plans based on this.
  
  

Careful Planning

• There is one circumstance under which accidental death insurance is subject to taxation. If you name yourself -- or people deceased at the time of your death -- as beneficiaries, the payout becomes part of your estate. As part of your estate, the money will be subject to all taxes that the federal, state and local government apply to estates. These can be significant, so it's best to name somebody else as a beneficiary to your accidental death policy and to update it regularly.