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Dianne Williams, MBA

Certified Retirement Counselor®

Since 1983 in the financial services and investment industry

 

Retirement Pathways, Inc.

4965 U.S. Highway 42, Suite 1000

Louisville, KY 40222

 

Phone:  502-797-1258 

 

Email: dianne@retirementpathways.com

Website: www.retirementpathways.com

May/June 2019

Life Insurance and Taxes

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Life insurance is a crucial element to most personal risk management strategies, but it can also be one of the most tax-efficient vehicles in your financial toolkit. The following examines how life insurance may affect your overall tax picture.


It’s About Life
Life insurance is sometimes called the gift of love. In its most basic form, you buy a life insurance policy for its lump-sum death benefits directed to your beneficiaries. For most people this benefit is a way to financially protect loved ones, but there may be tax consequences, too.


There are no tax benefits connected to premiums you pay for an individual life insurance policy, but you may owe income tax on employer-paid life insurance of more than $50,000 or if your premiums were tax-deductible. Beneficiaries may also owe income tax on employer-paid life insurance if any cash value increased the death benefit.


However, death benefits are typically income tax-free to the beneficiary in most instances, and cash value (in those policies that offer it) grows tax-deferred. Dividends, which some life insurance policies pay when expenses are lower than anticipated, also don’t trigger taxes. Dividends are not guaranteed. There are a number of ways that cash value and insurance surrendered during your lifetime can have tax consequences, so work with your financial and tax professionals to make sure you don’t trip over certain rules.


Ownership Matters
Most families that pay life insurance premiums with after-tax money either through the workplace or individually won’t notice any tax advantages until the policy’s death benefits are paid. That’s when beneficiaries receive benefits that are typically income-tax-free. This isn’t necessarily the case, though, when it comes to estate taxes.


True, the federal estate tax exemption amount has increased markedly to over $11 million (over $22 million for couples filing jointly) in recent years, affecting only a small percentage of Americans. But some states that levy estate and inheritance taxes have much lower tax thresholds.


If you use a life insurance trust to buy and own life insurance (with the help of an estate planning attorney), you can help shield loved ones from estate taxes on the death benefit, no matter how much it is.


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* Securities offered through American Equity Investment Corporation. Member FINRA/SIPC. 4222 Grant Line Road, New Albany, IN 47150. Investment advisory services offered through American Capital Management, an SEC Registered Investment Advisor. Retirement Pathways, Inc. is independent of American Equity Investment Corporations and American Capital Management.

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