Before continuing, I want to thank you for your time in reading my article and remind you that the information here is for the purpose of providing you with a consultation that will help you make the options you can count on, based on your budget, needs and reality. when analyzing acquiring financial protection. I am not a financial analyst or planner nor will I ever take or tell a client what product he needs. That is a sole decision of the client and you should always consult with your accountant or authorized CPA with any questions related to his financial status before making a decision.
Let's analyze together 6 very important topics when looking for life insurance that meets your needs. Since it is a decision that will last for the rest of your life, it is worth taking some time to analyze this information. Ready? Let's get started!
A. Are life insurance proceeds taxable?
Good question since it is reasonable to think that it happens when you receive a substantial amount of money through life insurance. And since we know that literally, we have to pay taxes on any profit we make, we can say that it is a very important question. In general, life insurance proceeds that one receives as a beneficiary due to the death of the insured person is NOT included in gross income and does not have to be reported. However, any interest you receive is taxable and should be reported as interest received. If the policy was transferred for cash or other valuable consideration, the income exclusion is limited to the amount of the consideration you paid, any additional premiums you paid, and certain other amounts.
Generally, this income is not taxed as income, but may be taxed as part of the estate if the amount passed on to your heirs exceeds federal and state exemptions. Also, you may face capital gains taxes if you dispose of the policy through a life insurance settlement or by turning it over to the insurer. Life insurance death proceeds are not taxable with respect to income tax, as long as the proceeds are paid in full as a single lump sum payment.
However, if your beneficiary receives the life insurance payment in a series of installments, the insurer will generally pay interest on the outstanding death benefit. Parents sometimes request that their life insurance death benefit be paid in installments if their beneficiary is a young child or someone who will depend on that income. In these cases, the beneficiary would have to pay income taxes on the interest.
B. Which life insurance pays more?
Very good question, and many ask it when considering life insurance. Based on need, which life insurance payment option should I choose? A life insurance payout will provide much-needed financial support if you lose a spouse or partner.
If you are a beneficiary of life insurance, you have several options with the money you
receive. Pay funeral costs, pay bills, cover the cost of child care, or set aside for future expenses. In deciding its use, you must also decide how you will receive payment for life insurance. Since there are several options for such payment, it is important to understand them and choose the one that suits your personal situation. Having this knowledge in advance helps you not have to make a decision during a difficult time.
That said, when collecting a life insurance death benefit, a claim must be filed with the insurance company. By knowing the name of the company, the beneficiary has everything he needs to get started. You must obtain the policy and verify that you are listed as a beneficiary, complete the claim form and submit a copy of the death certificate or if you have a product that provides you with a partial or full acceleration of living money, gather the documents needed to investigation and approval of the claim. Once the process is complete, the payment should take as little as a few days or several weeks.
If the claim is generated within two years after the purchase of the policy, perhaps the process may take longer since the insurer needs to verify that no fraud or misstatement is being committed about the health of the insured. If the claim is denied (which is very rare), the beneficiary will typically get only the amount of premiums paid over the life of the policy, not the full death benefit. During that claim process, you will have the option to decide how you want to receive your insurance payment. Note, the insurer only lists the payment options for you but will not provide any additional information about them. Hence, the importance of knowing and understanding the options before making a selection. Among the options, you can choose the following:
Lump Sum Payment - As the name suggests, a lump sum payment allows the life insurance beneficiary to receive the entire death benefit at one time. This option generally does not count as taxable income (only in rare cases would an estate tax come into play). It has in its favor that this option is the most common to choose since it provides greater flexibility. It can also be overwhelming to receive such a large amount of money all at once so it would be wise to use it wisely. In the end, it is the decision of the beneficiary who receives the amount.
Retained Assets Account - Another option is to leave the payment with the insurance company in an interest bearing account. Insurers usually provide a checkbook so you can access the cash in the account. You may also be offered an interest income option, but you will only be paid interest earned on the death benefit amount. This option has in its favor, that you do not have to worry about the insurance limits of the FDIC (Federal Deposit Insurance Corporation) if you leave a large death benefit payment with the insurance company since the company will protect the entire amount. On the other hand, the interest rate the insurer provides may not be as high as what she can get on a high-yield savings account or by investing the money. In addition, the interest earned on the account will be subject to taxes.
Income payments for life - Converting an insurance payment into an annuity is another option he has. It gives you guaranteed payments for the rest of your life if you schedule it that way. The amount of the payment will be based on his age at the time he filed the insurance claim and the amount of the death benefit. This option works in your favor in that lifetime income may be a good option if you are worried about missing out on a large lump sum payment. It will give him peace of mind that he could get more than the policy's death benefit amount if he lives longer than the insurance company expected when calculating his guaranteed payments. Keep in mind that the younger you are, the lower the payment amounts as they would have to be spread over a longer period of time. There could be fees associated with this option, and a surrender fee if he wishes to withdraw all of the cash. Also, if he dies before collecting the full life insurance benefit, the insurance company will keep whatever is left.
Lifetime income with certain period - Allows you to ensure that payments will continue for a certain period of time, even if you die. Choose a lifetime income with a specified 10-year period and you die in year three, the beneficiaries you designate will continue to receive payments for another seven years. If the person dies within a certain period of time, the beneficiaries will receive payments instead of the insurance company to keep any remaining life insurance death benefit. But these payments will be lower than they would be with a traditional life income option to offset the guaranteed payment period.
Specific Income Payment - You will receive your life insurance payment in installments. Unlike the lifetime income option, you can choose the period of time over which you want to receive payments and the amount of payments. This works in your favor if you are worried about spending a lump sum payment too quickly as it can give you more flexibility than the annuity option because you can set the payment terms. Still, it's noted that you have less flexibility than you would with a lump sum payment, and any interest earned will be taxable.
C. Will life insurance cover the mortgage on my home?
Buying a home is an exciting time, but there are many decisions that come with buying a home, including whether to purchase mortgage life insurance. This insurance, known as mortgage protection insurance, is a life policy that pays your mortgage debt if you die. This policy can keep your family from losing their home, but it's not always the best life insurance option. What do you need to know before making this decision?
How does mortgage life insurance work?
Normally, it is acquired at the time of buying the house or later. The duration of the policy will coincide with the number of years to pay the mortgage. It is usually sold by the mortgage lender, an insurance company affiliated with the lender, or another insurance company that mails you after finding your information in public records. If he himself is purchased from the mortgage lender, the premiums can be transferred to the loan. The mortgage lender would be the beneficiary of the policy, not the spouse or other chosen person, which means that the money goes directly to the mortgage balance and the family receives nothing.
Two co-borrowers can usually be insured under the mortgage insurance policy. If they die at the same time, the policy pays the mortgage. If only one person dies, coverage continues for the other person. This type of coverage provides the peace of mind of not worrying about the home mortgage if the borrower dies. Still, it must be emphasized that term life insurance can provide the same peace of mind and much more.
Term life insurance (you can get more information about it at this link) gives the insured family the flexibility to decide how the payment for the insurance will be used. This allows the beneficiary to choose to pay off the mortgage debt, and to use the remaining amount as needed. You can also choose an amount or duration of coverage that takes into account other financial responsibilities you want to cover, such as annual income or your children's college tuition (learn more about how life insurance helps you build an educational fund)
There are some disadvantages that come with mortgage insurance. Since they don't take into account the insured's health status, these mortgage insurance tends to be more expensive than term life insurance for the amount of insurance you get. If the person is in good health, it is a better option to work with term life insurance. Another point is that the mortgage insurance payment decreases to match the balance of the mortgage, but the initial premium remains the same, it does not change. Another aspect is that it tends to be difficult to get a good quote online for this product, you usually only get what the mortgage lender offers which can limit your options. The lack of flexibility in this product is observed when the family's needs begin to change over time and unfortunately the mortgage insurance goes directly to the mortgage lender so you can't count on him for anything else.
D. What is the best life insurance?
Perhaps, that is the question that we all ask ourselves, either at the beginning or at the end of deciding which life insurance I am going to work with, with which company I will place my trust and money. How can I choose the type of life insurance that is right for me? This task can be a bit confusing but it is also a very important decision. Let's see what key points help us to choose appropriately.
Term life insurance is good to consider if you need protection for a specific period of time as it allows you to match the duration of the policy to the duration of the need. Another key point is that you need a high amount of life insurance but you have a limited budget. This type of product only pays if the insured dies, unless it has a product that contains accelerated benefits that allow a partial or complete acceleration of your life policy if it meets the requirements. (For more information on how accelerated benefits can help you, schedule your complimentary consultation here.)
Another key point of term insurance is that if your needs change, you can choose to convert your product to one that provides protection permanently (or until age 121).
Permanent life insurance will provide protection for as long as you need it. Another feature about this product is the opportunity to accumulate cash value within the policy, tax-free, which can be used as a loan for a variety of purposes or needs. This savings element can be used to pay the premiums and keep the life insurance active if for some reason the insured cannot pay them. It must be considered that the contributions or premiums for these products are higher than those of a term policy. However, said premium will remain level regardless of age, when in a term policy, if it were renewed, the premium would increase in price taking into account the age of the insured. There are different types of permanent policies which can be adjusted to your needs and budget.
You can use this tool to find out what is the qualification of the insurance company with which you have in mind to work (AM BEST RATING SERVICES)
E. Why is life insurance NOT an indemnity contract?
First of all, what is compensation? The technical definition is compensation for having caused harm either actively or passively to another person. The common way to compensate is with money, therefore, compensation is usually monetary. That said, life insurance is not related to an indemnity contract since the insurer does not undertake to indemnify the insured, but in the event of his death, he agrees to pay a certain amount or sum to the beneficiary assigned in the policy. Therefore, a life insurance policy is not compensation, since it only pays a certain amount by contract.
F. Can life insurance be reported as a business expense?
The answer is yes. As a business owner, you can deduct the premiums on life insurance policies as long as those policies are owned by the officers and employees of the business and paid for by the business. When are they then deductible? If group term life insurance is offered to employees, you can deduct premiums that pay up to 50K of coverage per employee. In other words, if an officer or employee reports his employer's owned life insurance premium as income, he too can write off this expense as his employer.
Is business life insurance deductible? The contribution or premiums paid for the life policy intended to support the family in case of death is not tax deductible, even if you pay the premiums from the business checking account. Now, if the life insurance policy is to protect business assets, the life insurance premiums are tax deductible. Premiums are deducted as a business expense only when the insured is an employee and the business is not a beneficiary on the policy.
We were able to notice that these points, although they seem quite normal, are very important to understand when purchasing a product that works correctly for your needs. Always study and analyze the information presented and consult with your financial planner what options are available on the table. It is an important decision, which shapes and protects the future of the family if the insured dies, so it should not be taken lightly. Do you want to know more? Fill out the pre-evaluation form and schedule your complementary consultation. Let's start working on what you need. Do not wait more. All this, that is always part of your Safe Planning.
Internal Revenue Service Dept. Life Insurance & Disability Insurance Proceeds https://www.irs.gov/faqs/interest-dividends-other-types-of-income/life-insurance-disability-insurance-proceeds#:~:text=Generally%2C%20life%20insurance%20proceeds%20you,report%20it%20as%20interest%20received.
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Affordable Life USA. By Eric Van Haaften - Business Life Insurance. Tax Deductible Life Insurance for Business Owners. https://affordablelifeusa.com/tax-deductible-life-insurance/