Life insurance can help make sure the size of your estate is not severely depleted at death. In most instances, life insurance proceeds are paid income tax-free to your beneficiary(ies). They can also be arranged to be estate tax-free.
Besides replacing the lost income of a wage earner, the proceeds from a life insurance policy can pay the estate's income taxes, state death taxes, funeral costs, any outstanding debts, and other miscellaneous expenses that occur at death.
Life insurance can also:
- Create an instant estate, and pass to heirs as income, often income tax-free
- Build cash value for loans for college expenses, mortgages, etc.
- Build credit
- Finance charitable gifts
- Compensate a company if a key employee dies
- Fund trusts, or buy-outs in businesses
Without life insurance proceeds, a portion of your estate may have to be sold quickly to meet expenses. This often forces your heirs to sell assets at depressed prices because of the immediate need for cash. The result: a depletion of your estate and a reduction in the amount your heirs receive.
Generally, insurance proceeds are exempt from income taxes. There are subject to estate tax only if they are payable to your estate, or you have "incidents of ownership," or you transferred the policy to someone else three years before your death, etc. Gifts of life insurance policies may be subject to the gift tax. State inheritance taxes usually don't tax if they are payable to a beneficiary other than yourself.
How Much Is Enough?
How much insurance you need, and what type, is best answered in a one-on-one meeting with your agent, as it must be tailored to your specific needs.
When deciding on an amount, make sure to consider factors such as the rising costs of your children's educations, increasing medical costs for your spouse, and any remaining mortgage payments.
There are also many riders that you can place on insurance policies: you can read about them here.
- Did You Know...?
If you give away a life insurance policy within three years of your death, it is included in your taxable estate for federal estate taxes.
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|Estate Preservation: Life Insurance|