Tax Planning with Life Insurance

Tax Planning with Life Insurance

When you buy a life insurance policy, you are not only buying security for your family after your sudden demise, but you are also investing money, and investments are subject to taxation. As per Internal Revenue Code, investment proceeds are taxable, and life insurance always raises a question as to whether life insurance proceeds are taxable. 

If you are also wondering about the same, then this guide is for you, where you will learn about tax planning in Phoenix.

Types of Life Insurance

Before diving into tax planning with life insurance, you must know the main types of life insurance you can buy.

There are two types of life insurance policies – term life insurance and whole life insurance. 

Term life insurance is insurance for a fixed term, say 10-30 years. It pays out the policy amount if you pass away during the policy period. It is an affordable option if you cannot pay a huge premium. The disadvantage of this policy is that it has no cash value accumulation.

A whole life insurance policy is also called permanent life insurance because it lasts a lifetime. Your family will receive the insurance proceeds whenever you pass away. The cash value also builds up over time in this policy. But it is a more expensive option.

You should buy life insurance when you are in your twenties. It will lower the premium amounts, and you can enjoy good coverage. Besides, if you don’t smoke and drink and are not engaged in life-threatening activities, you pay a lower premium.

Are Life Insurance Proceeds Taxable?

No, they are not. For example, if you passed away and had a $500,000 coverage, the amount shall not be added to the recipient’s gross total income.

Also, if you are a policyholder and surrendered your life insurance for cash, you must report it in your income tax filing. Any amount you receive more than your insurance policy cost will be taxable, less any rebates, premiums, unpaid loans, or dividends. Form 1099R is used to report the taxable portion and the total proceeds.

However, when policy loans are taken from the cash value, it is not recognized as taxable income so long as the cash value amount does not exceed the amount making it a Modified Endowment Contract (MEC).

To insure you have a properly designed policy, you should meet with a licensed life insurance professional in Phoenix. 

What Not to Do with Your Life Insurance?

These are the tips for buying life insurance policies.

Never buy it through your employer. You might lose your job and life insurance coverage at a crucial time, which is completely undesirable. Moreover, it is risking your future.

If you own a business, check with your spouse whether they have employer-sponsored life insurance. Discuss it with your partners, too, if any, as it can be helpful in settling taxes and debts.

Sit down with your insurance agent for tax planning in Phoenix, and learn about the coverage you can get, considering your age and lifestyle. 

Estate Planning with Life Insurance

When you are signing a life insurance contract, it is important to read between the lines. The fact that you do not understand it completely is acceptable. And that’s why you need an insurance agent to help you get the best you deserve.

The most important thing is to see whom you refer to as your beneficiary. Do not make your life insurance “payable to the estate.”

If you do not name any beneficiary, the benefits will accrue to the estate, and all your final expenses will be deducted from your estate.

Final expenses include:

Your estate will go to the government, and they will pay the final expenses, taxes, etc. Plus, if you have any outstanding liabilities, your estate will become liable to pay them. And if your creditors decide to claim liabilities through your estate, they can go for probate in court. 

Also, when the life insurance proceeds are payable to the estate, it will add value to your estate. However, it means revaluation of your capital asset, resulting in increased estate taxes.

Thus, you should name a beneficiary in your life insurance. The life insurance proceeds received by the beneficiary shall be tax-free after your demise. 

How Can a Trust Help?

You can discuss it with your insurance agent and establish trust. A trust can have multiple goals, for example, paying a fixed amount to your surviving spouse, paying for the education of your dependent children, or any other cause. 

Experienced Tax Planning in Phoenix with Life Insurance

Heroes Financial Group is committed to helping you on your journey to acquire life insurance that meets all your needs. Our agents have the required professional knowledge and can help you plan your taxes with life insurance. 

Contact us today for estate tax planning in Phoenix! 

Leave a Reply