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Andy,

It's the difference between income taxes and estate taxes...

It's true that the beneficiaries of insurance generally pay no income taxes on their inheritances. Of course, life insurance is not unique in that regard, in many cases, beneficiaries of any inheritance pay no income taxes on the inherited amounts. (There are exceptions, of course... Always exceptions. It's the tax code, after all.)

The deceased person's estate, however, may owe estate taxes on the insurance if the deceased 'owned' the insurance. See http://www.insuranceiq.com/columns/estate/estate20020111.asp , or if you want to get detailed about it, see IRC §§ 2042 and 2035.

-Chuck
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