Death Benefit Proceeds<\/h3>\n
This can be extremely beneficial to the insured’s survivors, as they will know exactly how much will be available for paying final expenses, as well as other debts and obligations that may be due.<\/p>\n A key reason for this is that the federal government is reluctant to impose income tax on a product that is essentially designed to provide a financial cushion to those who have lost an income earner or other loved one who had provided some type of financial support to them.<\/p>\n Therefore, it is felt that life insurance death benefits provide indemnity or restoration.<\/p>\n Permanent life insurance<\/a> policies typically allow a savings or investment component as a part of the policy.<\/p>\n Here, a portion of the policy holder’s premium is deposited and allowed to accumulate as cash. And it is allowed to grow based on the performance of an underlying market or investment.<\/p>\n The cash value portion of a permanent life insurance policy is not taxed on an annual basis per IRS guidelines.<\/p>\n Rather, these funds are allowed to grow on a tax-deferred basis. And they are only taxed at the time of withdrawal. This can provide them with the ability to truly compound over time.<\/p>\n The tax deferral can also offer an additional potential benefit should the policy owner wait to withdraw funds until after they have retired.<\/p>\n This is because, at that time, he or she may be in a lower income tax bracket, therefore being charged an even lower amount of income tax on the withdrawn funds than if they have been taken out an at an earlier date.<\/p>\n Life insurance policyholders are also allowed to borrow against the cash in their policy.<\/p>\n The proceeds from such loans are generally not taxable unless the policy is considered to be a MEC<\/a> (modified endowment contract), in which case the funds will be treated as if they were “income-out-first.”<\/p>\n Life insurance death benefit proceeds are free from income taxation. But they are included in a decedent’s overall estate. As long as the insured is also the owner of the life insurance policy.<\/p>\n Therefore, unless steps have been taken to remove a policy from an individual’s ownership, the amount of a policy’s death benefit will be included in one’s taxable estate. And will thus be included in the amount to be taxed.<\/p>\n For many years, however, life insurance has also been used as a tool for reducing or eliminating the estate taxes that are due.<\/p>\n Once a policy’s proceeds have been successfully removed from one’s estate, they can then be used for paying estate taxes. Without being taxed as a part of the overall estate.<\/p>\n One way to remove life insurance policy proceeds from an insured’s estate is to set up an Irrevocable Life Insurance Trust<\/a>, or ILIT, to instead become the owner of the life insurance policy.<\/p>\n The ILIT is irrevocable. This means that the insured generally will not be able to change the terms of the trust once it has been signed. Also, another individual must also be selected as the trustee of the ILIT.<\/p>\n Likewise, the insured also cannot be the beneficiary of the trust. However, his or her children can be – and oftentimes are.<\/p>\n Also, the ILIT cannot be made payable to the insured’s estate or to his or her revocable living trust (if applicable), as the insured’s ability during his or her lifetime to change their will or trust will also then result in the ability to change the beneficial enjoyment of the life insurance policy’s proceeds – in turn, essentially bringing back the policy into the estate<\/a>.<\/p>\n For the 99% of policyholders and beneficiaries, they won’t have to worry about any taxes.<\/p>\n There are a few cases and circumstances where taxes are going to come in.<\/p>\n One of those is if the beneficiary decides to get the payout in payments instead of one single lump sum. This is why we always tell beneficiaries to get the money at one time.<\/p>\n![\"couple](\"https:\/\/www.bestlifequote.com\/wp-content\/uploads\/2014\/02\/couple-looking-over-their-life-insurance-plan-details-300x200.jpg\")
One of the biggest tax-related benefits to life insurance is that the death benefits are received free of income taxation to the policy beneficiary (or beneficiaries)<\/a>.<\/p>\nLife Insurance Cash Value<\/h3>\n
Withdrawal versus Loan<\/h3>\n
Estate Tax Issues<\/h3>\n
Removing Proceeds from the Estate<\/h3>\n
When Life Insurance Is Taxed<\/h2>\n
If The Beneficiary Chooses Payments<\/h3>\n