I try never to assume that everyone knows all of the benefits of life insurance. One that is huge beyond measure for your heirs is that the life insurance benefit that you leave behind is not income taxable. Unlike hitting the lottery, the government has graciously agreed to keep their hands off of your life insurance proceeds and allow your heirs to keep their hands on 100% of what you left for them.
A couple of thoughts along those lines. A study recently showed that about 75% of retired people left much of their retirement behind in the form of unused IRA, 401k and annuity money. They just didn’t need it. While I have encouraged my parents to spend their money, the truth is that like most, they simply don’t need all of it.
The problem is that the inheritance they are leaving behind will be taxable. The solution, once they realize that there is money that will just draw interest until they die, is to use that money to purchase life insurance, turning taxable inheritance into non taxable inheritance.
Another life insurance non taxable event is when a return of premium term insurance policy matures. The way return of premium term works is that, for example, your $500,000, 30 year term policy has a cost of $1000 per year. If you die during their term, your heirs get $500,000. If you outlive the term, you get an income tax free return of all of the premium you paid in. $30,000 income tax free.
At another time I will speak to the estate tax connections to life insurance and how best to prepare for estate taxes if you have an estate that exceeds the current federal exemption of $2,000,000.
This post is somewhat dated. Life insurance underwriting is changing and evolving continually. For more updated information check out some of the key word links. If you have a specific question or topic you need information for do a search. If you don’t find the answers you need contact me and we’ll make sure you get the information that is important to you.