Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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Have To Pay Taxes On Life Insurance

As the tax laws stand right now, you do not have to pay taxes on life insurance if you are named a beneficiary on the life insurance policy. There are some situations where taxes will have to be paid on life insurance.

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Read on to learn when you may have to pay taxes and what to do to ensure that when you die your life insurance beneficiaries won’t have to pay taxes on their insurance benefit.

You Will Pay Taxes If…

As mentioned above, if you are named a beneficiary on a life insurance policy you won’t have to pay taxes on the insurance benefit. If, however, the insured person names their estate as the beneficiary then the money becomes taxable under inheritance taxes.

How does that work exactly? Let’s say your uncle decides that it would be easier to name his estate as the beneficiary of his life benefit and then list those that will inherit his estate in his will. Two things will happen.

  • First of all, the money will be ‘given’ to the estate; in other words, the value of the estate increases by the amount of the insurance policy.
  • Then the money can be used to pay off the debts of the insured person, which can reduce your overall benefits.

You see, when a life insurance policy names a beneficiary, that person is not legally obligated to pay off any of the insured person’s debts unless their name is attached to the debt, such as a co owner, co signer, etc. Companies that are owed a debt, however, can petition the state for the estate to be used to pay off the insured persons debts. When the insurance policy becomes part of the estate it can be used for this purpose.

You can expect to pay up to 47% in inheritance tax depending on how much you inherit.

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Give the Most to Your Beneficiaries

While there is no guarantee that the government won’t take it upon themselves to someday tax life insurance beneficiaries, until that time you can ensure that your beneficiary get the most from their benefits by naming them specifically on your life insurance policy.

You can only name one prime beneficiary on your life insurance policy and as many secondary beneficiaries as you want. If you want more than one person, such as your children, then you should consider designating a trust as a beneficiary so that the money can be distributed among several people without tax concerns.

In addition, you can name your business or your favorite charity as your life insurance beneficiary and still maintain the tax benefit. The only time the tax free benefit is forfeited is if you name your estate as the beneficiary for the reasons mentioned above.

You should also be aware that you can change your beneficiary or beneficiaries at any time for any reason; this isn’t like health insurance where you have to wait until enrollment time to add or remove someone from your policy. Simply contact your insurance agent and have them prepare the paperwork for your signature to make the change.

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Getting the Best Insurance Policy

The best reason for you to purchase a life insurance policy is to prepare for the future. A life insurance policy provides protection to your family or business if you should unexpectedly die. When you purchase insurance, however, you want to ensure that you get the very best rate in addition to purchasing the right amount of coverage.

The first thing that you want to do is determine just how much of a benefit you want to purchase for your life insurance policy. There are varying opinions about this with some people suggesting that you should provide enough money to pay off all debts and allow your loved ones to live for one year without having to work while other suggest that you purchase three times more than your annual income.

Another train of thought is that you should provide a sufficient amount to cover your children’s education as well as paying off debts and leaving your loved ones comfortable. What they don’t talk about is the cost of buying policies that cover so many contingencies.

The bottom line is that only you can determine how much insurance is best for your situation. You should consider, however, your debt, your family’s ability to pay off any debt without additional money, future debts and quality of living for your family. With that being said, you could be looking at a policy that exceeds $500,000, which can equal a high premium payment each month. If you are concerned about these issues, especially if you have dependents, then you can choose term life insurance instead of whole life insurance.

Term Life versus Whole Life

Term life insurance allows you to purchase a much higher life insurance policy at a reasonable rate; however, once the term expires you have no cash equity in the policy. This means that if you survive for the life of the policy then there is no benefit paid to your beneficiary. This isn’t necessarily a bad thing, especially if you have a real concern about your family if you should die; many people benefit from this type of policy as it ensures that every contingency is covered in case of death.

A whole life policy offers cash equity, which means that after a certain amount of time you can cash in your policy if you have paid enough in. In addition, there is a guaranteed payout when the insured dies, no matter how old the policy is. It is, however, two to three times more costly to purchase a whole life policy versus a term life policy. Many people simply find that they cannot purchase the amount of insurance that they desire when choosing a whole life policy.

Some people do choose to carry both types of policies at one time; a small whole life policy that will be sufficient, should the insured live a very long time, to pay off existing debt and provide for their spouse (if applicable) and a term life policy that could cover everything should an unexpected death occur or the insured die young. Others choose to carry a term life policy until they are in their 50s or 60s and then switch to a small whole life policy when the term life policy expires. The choice is up to you.

In any case, you want to ensure that you get the best price on your monthly premiums. To do this you will want to shop around to different insurance companies. The fastest way to do this is by using a free quote tool. These tools are easy to use and will provide you with quotes for your different coverage options so that you know what you can expect to pay for different types of life insurance.

If you start now, in just a few minutes you will have quotes from several companies for you to compare. Why not give it a try?

To get free life insurance rates use the quote tool and your zip code immediately!