Tax on Life Insurance

Few people realize that, even though they may have a modest estate, their families may owe hundreds of thousands of dollars in estate taxes because they own a life insurance policy with a substantial death benefit. This is so because life insurance proceeds, while not subject to federal income tax, are considered part of your taxable estate and are subject to federal estate tax.

The solution to this problem is to create an irrevocable life insurance trust that will own the policy and receive the policy proceeds on your death. A properly drafted life insurance trust keeps the insurance proceeds from being taxed in your estate as well as in the estate of your surviving spouse. It also protects the trust beneficiaries from their own “excesses”, against their creditors, and in the event of divorce. Moreover, the trust also provides reliable management for the trust assets. Here's how the irrevocable life insurance trust works.

You create an irrevocable life insurance trust to be the owner and beneficiary of one or more life insurance policies on your life. You contribute cash to the trust to be used by the trustee to make premium payments on the life insurance policies. If the trust is properly drafted, the contributions you make to the trust for premium payments will qualify for the annual gift tax exclusion, so you won't have to pay gift tax on the contributions.

The life insurance trust typically provides that, during your lifetime, principal and income, in the trustee's discretion, may be paid or applied to or for the benefit of your spouse and descendants. This allows indirect access to the cash surrender value of the life insurance policies owned by the trust, and permits the trust to be terminated if desired despite its being irrevocable. On your death, the trust continues for the benefit of your spouse during his or her lifetime. Your spouse is given certain beneficial interests in the trust, such as the right to income, limited invasion rights, and eligibility to receive principal. On the death of your spouse, the trust assets are paid outright to, or held in further trust for the benefit of, your descendants.

If you own a life insurance policy with a significant death benefit, an irrevocable life insurance trust may be of substantial benefit to you. Contact me you would like your situation assessed to see how you could benefit from an Irrevocable Life Insurance Trust.

Using life insurance in business and estate succession planning

In years past, life insurance was sold and thought of as burial insurance. Many individuals today still use it primarily to pay for burial or final expenses as these costs can be a financial burden on families. There are several other good reasons to purchase life insurance, including replacing lost income, paying outstanding debt, and planning for children’s education.



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Life Insurance

Reprint from the Strauss & Associates, P.A. Website Client Newsletter


Life Insurance


There are many different types of life insurance policies to choose from. They vary based on cost, benefits, terms and flexibility. Below you will find a general description of the most common types of life insurance policies.

Traditional Whole Life Insurance

Sometimes referred to as permanent or ordinary life insurance, this type provides coverage over your entire lifespan. Generally, you are guaranteed a certain premium payment that will not increase over the life of the policy. The premium paid each month covers the cost and expenses of the insurance while the remaining money is deposited into a cash value account. The amount of money in the cash value account accumulates over time as you make more payments. In whole life insurance policies, you do not have the option of choosing how the money you pay is invested. You can take loans from your cash value account or use it as collateral to borrow against. However, any money that is not repaid lowers the value of the death benefit your beneficiaries will receive.

Term Life Insurance

With term life insurance, you purchase coverage for a limited amount of time, generally one to 30 years. If you do not die during the term, your coverage ends and you will not receive a refund of the premiums you paid. These policies generally cost more if you are older when you purchase them, and unlike traditional whole life insurance, the premiums you pay will increase in regular intervals as you get older. People generally purchase term life insurance policies for periods in their lives when they want additional life insurance coverage. For example, some families purchase them while they have young children to provide extra coverage for them if something were to happen to one or both parents.

Universal Life Insurance

Universal life insurance is a type of permanent life insurance that offers some flexibility to the policy owner. Like traditional whole life insurance and term life insurance, you do not get to choose how the money from your premiums is invested, but you do get to choose when and how much you pay in premiums. With universal life insurance, you are provided with a range of premium choices with a set minimum and maximum amount. From this range, you can choose how much you want to pay and when you want to make your payments, such as monthly or in one lump sum. Your choice of premium and payment schedule will affect the value of your cash value account and death benefit under the policy.

Variable Life Insurance

Variable life insurance policies allow you to choose how to invest the money you pay into them. Generally, these plans will offer you different investment options, known as “subaccounts” and you choose the one that best fits your investment goals and needs. The choices normally range from relative safe investments to more aggressive ones. The subaccounts are then managed by professionals. Variable life insurance policies have a fixed annual premium that you pay while you have the policy. While some policies provide a fixed death benefit, generally money is applied to your death benefit only after you reach a certain set amount in your cash value account.

Variable Universal Life Insurance

This policy offers the most flexibility of all of the life insurance choices, combining the advantages of universal and variable life insurance policies. Like universal life insurance, you choose the amount of the premium and when you will pay the premium from a range of choices provided by the policy. Like variable life insurance, you also get to choose how to invest your money by selecting a subaccount. There is no guaranteed minimum cash value or death benefit for variable life insurance policies. Some policies, however, will guarantee a limited death benefit that is not connected to how your subaccounts perform. Any amount left from your premium after paying administration and insurance costs is applied to your subaccount. Like other life insurance policies, you can take out a loan from the policy, but it will reduce the cash value of the policy and the withdrawals may be taxable.

Life Insurance Reviews

It is important to have older life insurance policies reviewed, as there have been changes in the life expectancy tables.  Often a review can reveal opportunities to reduce your premium, increase your coverage, obtain guarantees, or shorten the the number of required premiums.  Typically, the review process is free, and a medical preliminary inquiry can be made without filling out any actual policy applications.  Some life insurance professionals charge a fee for the review, which can help eliminate any bias in the making of recommendations.