Life
insurance's most known benefit is the lump sum
payment to protect your loved ones in the event
of death. This is only half of the story
if the beneficiaries are correctly listed during
the
application process (or upon review during
the life of the policy). Life insurance is
one of the few (and decreasing) ways to receive
money without taxation. Congress routinely
threatens to tax life insurance benefits in its
ever-increasing search for more revenue but the
political backlash has proven to be too
strong as a result of the huge tax benefits
associated with life insurance. Let's look
a little closer.
The stories
of probate are just plain depressing. The
last thing your loved ones want to deal with
after such a loss is the often lengthy, usually
expensive, and sometimes confrontational result
of estate probate. If assets are not
properly and specifically designated then they
will typically will go towards a deceased
person's "estate". This estate is usually
subject to taxes and creditors. This can
all be avoided with proper estate planning but
most people are unaware of the complications
that arrive during the process of probate.
In the U.S., people tend to avoid or put-off
decision that deal with death (and long term
disability for that matter). It's
important to see in real terms what this can
means so let's look at just the taxation angle.
Let's look at
leaving your family $500K in money/assets versus
$500K as a term life benefit to see what a
difference life insurance can make. Now
proper estate planning may be able to help, but
with such a large amount as $500K, the taxes can
easily be 50% (Federal and State) since it is
falling in one tax year as a lump sum.
That means that one $250K out of the original
$500K might go to your loved ones.
This so called inheritance tax occurs all the
time because people are ill-prepared or unaware.
Let's take the case of a life insurance benefit
being paid out. If the beneficiary is
correctly listed, the full $500K would go the
beneficiary with no taxation. This is a
huge benefit to life insurance.
Surprisingly,
the net assets (total assets minus total debt)
is not that high in the U.S. On average,
Americans tend to carry a great deal of debt and
this trend has been increasing if anything.
Once Uncle Sam has taken his share (the above
50% for example), estate assets can be subject
to various creditors. The remaining $250K
may now be reduced another $100K to $150K.
We have now gone from $500K to $150K.
Again, term life insurance benefits are
typically not subject to creditors as well.
It really is an short cut around the huge
pitfalls for large sums of money to be passed on
to your loved ones.
Let's talk
about how to structure the
life insurance beneficiary so that
the death benefit is protected from taxation and
the pains of probate.
Clarity in how the benefit is to be
paid to beneficiaries is also extremely
important with term life insurance
policies. For example, if you have
three children and designate an equal
amount to each, what happens if one
deceases before you or cannot be found?
Specify exactly how this type of
situation would be handled so there's no
confusing. Wills are not a
substitute for properly naming your term
life beneficiary as wills traditionally
deal only with estate issues (probate).
Probate is subject to taxes and
creditors so it's important to name a
person's name directly as a beneficiary
to avoid this.
We recommend
speaking with an estate planner to truly
understand the options available to avoid as
much of the sting of probate as possible.
We are here to help you with the
term life
insurance part of this strategy as it remains
one of the hidden gems of insuring your assets
go to your loved ones. |