Is Life Insurance Taxable 2019-2020

Is Life Insurance Taxable 2019-2020?

Life insurance coverage is there to provide an income in the event of an untimely death to the wage earner or person’s responsible for paying the bills.

It is also there to provide money for burial, final expenses, estate and other various taxes.

As we go through life we are all responsible to someone else, somewhere along the way.

By having life insurance in place it enables us to take care of those we are responsible for in the event that we are no longer alive to take care of them.

Some people have the good fortune and plans in place to save and properly invest so that if something were to happen they would have the money already there to take care of their loved ones.

This is good but they still should have Life insurance in place so the estate doesn’t have to be liquidated in order to pay for burial, final expenses and taxes.

No matter what happens these 3 things will have to be paid.

Is Life Insurance Taxable?

Many people wonder if the proceeds of a life insurance policy are taxable to the beneficiary.

The short answer is that most of the time, the policy payout (called a death benefit) is not taxable to your beneficiary.

That’s part of the draw of life insurance: a tax-free financial safety net for your loved ones.

One thing that most people do not consider is that these benefits can be added to the value of a taxable estate when they pass to someone other than a spouse.

A beneficiary of life insurance proceeds does not pay income tax on the proceeds – but the proceeds are included in the estate for estate tax purposes, and an estate tax will be charged on them if the value of the estate – including life insurance proceeds – is more than the tax exemption.


Life Insurance Beneficiaries and Taxable Estates

When you buy a life insurance policy, you sign a beneficiary designation form, just as you do with mutual fund investments and savings programs like IRAs and 401Ks.

These signed documents actually override what you say in your will or in your trust documents.

There is another way to keep life insurance proceeds out of your taxable estate – by placing the proceeds in an irrevocable life insurance trust.

Note that this is an ownership transfer. You cannot be the trustee of your own irrevocable trust, and the trust cannot be changed later on.

An ILIT removes the life insurance policy from the estate entirely, by changing ownership of the policy from the insured to a trust. The beneficiaries of the trust are the beneficiaries of the life insurance policy.

The best time to consider an ILIT is before purchasing an insurance policy. A new policy may be placed directly into the ILIT and potential tax savings will exist from day one. An existing policy may be retitled from individual ownership to an ILIT but there is a three year waiting period before the tax advantages become effective.

Why Do You Need A Life Insurance Trust?

Like any responsible parent, spouse or other family member, you likely have a life insurance policy to help support your loved ones in the event of your death. Or you may have purchased a life insurance policy as an investment to build your estate. But what you may not know is that, when you pass on, your beneficiaries may be responsible to pay estate taxes. A life insurance trust can help you to reduce or eliminate these taxes.

How Life Insurance Trusts Work

When you die, your estate becomes taxable in the eyes of the government.

As a default, your life insurance policy will pay out to your taxable estate, thus increasing the amount of the estate and possibly requiring taxes to be paid on it.

By creating an irrevocable life insurance trust, a trustee essentially becomes the owner of your life insurance policy.

Although this requires you to release control over the policy, you can decide who does have control, how your premiums are paid and who your beneficiaries are.

You can even determine how payments should be made to those beneficiaries.

Upon your death, the life insurance policy will not be released to estate, thus reducing or even eliminating the estate taxes required.

Life Insurance and Federal EstateTaxes

The federal estate tax is a tax imposed on the transfer of a “taxable estate” to a decedent’s heirs and beneficiaries.

The “taxable estate” is calculated by deducting funeral costs, debts, and assets transferred to a spouse from the fair market value of all assets, including life insurance, in which the decedent had interest at the time of death.

The American Taxpayer Relief Act of 2012 sets the estate tax rate at 40 percent for individual estates valued at over $5 million, indexed for inflation.

Additionally, married couples can effectively pass double that to their heirs because the law allows a surviving spouse to claim the deceased spouse’s unused tax exemption and add to the survivor’s  exemptions when the surviving spouse later dies.

Estate tax is only due for amounts that exceed the exemption amount.

This means that individuals can pass up to $5 million to their heirs ($10 million for couples) without any estate tax liability whatsoever.

At this rate, over 99.8 percent of individuals won’t have any estate tax liability.


Put the Insurance Load On Us


Life Insurance doesn’t have to be complicated.


Contact us with your questions


Phone: 813-964-7100 or 716-565-1300


Email us


Free Life Insurance Online Quotes