139 / Are proceeds of government life insurance exempt from income tax?

Yes.

The entire amount of the death proceeds is exempt, including the interest element in installment settlements. Likewise, any gain realized on lifetime proceeds from matured endowments or surrender of policies is exempt from income tax. Dividends also are exempt from income tax.¹ The interest on accumulated dividends is not taxable.² Accumulated dividends applied to the purchase of additional National Service Life Insurance and the additional paid-up insurance acquired are not subject to federal income tax.³

1. 38 U.S.C. § 5301(a); Rev. Rul. 71-306, 1971-2 CB 76.

2. Rev. Rul. 91-14, 1991-1 CB 18.