Are Life Insurance Proceeds Tax-Free?

Life insurance is an important tool in financial planning. It is important to have life insurance coverage in place to protect your loved ones financially.� However, there are a few important things to think about when it comes to taxes, not the least of which is whether your life insurance benefits are tax-free. By taking�the initiative and asking smart questions while you are determining your insurance provider and your coverage plan, you can take steps to ensure your benefits will come to your loved ones tax-free.

Tax Details to Focus On

- Beneficiary selection
- Life Insurance proceeds
- Interest rates
- Government timelines

Tax-Free Benefits

Generally speaking, life insurance death benefits are tax-free, with the exception of interest earned or other balances beyond the plan-specific amount.

Beneficiary Selection

Designated beneficiaries generally receive life insurance benefits tax-free. However, there is an exception to this exemption. If you designate your estate as the beneficiary, then the insurance benefits will be viewed as part of the overall estate by the IRS and will be subject to the estate�s taxes. By making an entity/person outside of the estate the beneficiary, estate taxes typically would� be avoided.*�That being said, it’s important to clearly define, under the terms of your coverage, who will hold the policy and who will benefit ultimately from it.

Life Insurance Proceeds and Your Estate

Life insurance proceeds held in a decedent�s estate are NOT tax-exempt and it’s important you make sure your life insurance benefits are not connected to your personal estate in order to avoid! taxes o n your life insurance proceeds. By separating your life insurance proceeds from your estate, your beneficiaries will receive the greatest amount of your policies, lump-sum amount.

So where can you find the legal details when it comes to your estate taxes and insurance policy? TaxAlmanac.org is a free online tool that will break each legal stipulation down to its parts. On the other hand, questions about estate planning are handled on a state-by-state basis and usually involve the probate codes of that state.

Interest Rates May Not Be In Your Best Interest At All

By default, most insurance companies pay the death benefit in one lump sum to the designated beneficiaries. Although rare, a policy owner can request that payments be made to the beneficiaries in installments. In this scenario, the multiple payments are attached to interest rates that can add up to big tax costs. You can check just how interest rates are taxed by the IRS before you sign up for a modified payment plan. Specific information is available at the IRS website.

When the Government Has Your Back

Federal policies and regulations passed since 2001 have really given life insurance policyholders a big break when it comes to beneficiary tax exemption, however, always check on federal timelines to see just how long exemptions will hold on your particular policy.

E-financial: Strategic and Helpful Planning

You can choose several routes when deciding how and where to purchase a life insurance policy that best fits your goals and family. One thing every policyholder has in common is a need for information. Knowing what to look for in a policy and what tax regulations apply could save you and your loved ones in the end.

Efinancial.com is a one-stop online resource for not only finding answers to your questions, but also finding insurance policies that cater to your lifestyle. Whether you want to talk with an agent, or simply research your life insurance options on your own, Efinancial is there ! with hel pful answers, experienced agents and money-saving resources.

* IRC:�Amounts received under a �life insurance contract,� that are paid by reason of the insured’s death aren’t included in the gross income of the recipient (i.e., beneficiary) [Code Sec. 101(a)]unless the policy was transferred for value. This exclusion applies to lump sum payments made at the time of the insured’s death, and to amounts paid later to the extent the payment doesn’t exceed the amount payable at death. [ Reg � 1.101-1(a)(1)].