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PLANNING FOR LIFE INSURANCE

Gregory S. DuPont Oct. 19, 2020

Many people also use their life insurance to fund retirement.  But life insurance is also a great way to look after your loved ones.  You can support them in life with the confidence that they will not be left out in the cold after you’re gone. A big part of this peace of mind stems from the fact that proceeds from a life insurance policy will be tax-free — giving your beneficiaries the full benefit of your policy. But this “fact” isn’t exactly set in stone. Without proper planning, your life insurance may subject your entire estate to higher taxes.

Exceptions To The Rule:  Normally, death proceeds are not considered taxable income to your beneficiaries. However, if at the time of your death your estate is your designated beneficiary, this rule no longer applies. The same is true if you retained incidents of ownership in your policy, such as the right to any cash values, the naming of beneficiaries, and the right to take out policy loans. In either case, the proceeds of your policy will likely be included in your estate for federal estate tax purposes.

Why This Happens:  There are a few limited reasons why you would name your estate as the beneficiary to your own life insurance policy, or else retain incidence of ownership. Primarily, you would choose to do this when you have the need for a complex distribution of the proceeds from your policy. For example, you may have children from a previous marriage you want to support, along with your current spouse. However, it’s far more common for an estate to be listed as a beneficiary accidentally. A Costly Mistake: Many proceeds wind up getting assigned to a policyholder’s estate because the holder simply didn’t update their paperwork. When a named beneficiary dies before the policyholder, most plans default back to their estate. Many people simply forget to update their plan after their beneficiary passes, leaving their loved ones to pick up the pieces once they’re gone.

If you haven’t reviewed your life insurance policy for some time, it never hurts to dust it off and ensure all the information still fits your goals. Talk to an estates lawyer today at DuPont and Blumenstiel, one of the top law firms Columbus, Ohio.