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How To Invest Life Insurance Proceeds

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A viatical settlement is not a liquid investment. You cant cash in your principal if you change your mind. There is no return on your investment until the insured dies and the death benefit is paid.

There is no guaranteed annual rate of return. The rate of return depends on when the insured dies and no one can perfectly predict a persons life expectancy. You should find out the life expectancy of the insured and how that determination was made. Remember that individuals who sell their policies in a viatical settlement may not have a life-threatening illness. They may be selling the policy because they cant afford it or no longer need it.

You are investing in a life insurance policy and premiums must be paid until the insured dies. Find out who is responsible for paying the premiums. Could you ever be responsible for paying the premiums? For example, if the insured lives longer than expected, will you have to pay the premiums? If so, this could decrease your rate of return.

What If You Cant Find The Policy Documents

Paperwork can get misplaced. People grow forgetful, or sometimes pass away before giving relatives the information they should have. If you believe you are named as a life insurance beneficiary, check online with the National Association of Insurance Commissioners’ Life Insurance Policy Locator Service, which searches a database of known policies from participating companies. However, not everyone will get an answer: Life insurance companies will respond to the request only if they have reason to believe there is a policy in the name of the deceased, and you are entitled to death benefits as a designated beneficiary, or authorized to receive information.

Are Life Insurance Proceeds Included In Your Estate

Before addressing whether life insurance proceeds are taxable to your estate, we first need to address the question of whether life insurance proceeds are included in your estate. Unless otherwise specified, life insurance proceeds are not part of your estate but instead go directly to the policys beneficiary and belong to them.

This means life insurance proceeds do not need to pass to the estate to satisfy any outstanding debts of the estate. However, that is unless the deceased makes the poor decision of naming the policy payable to my estate as the beneficiary.

When you choose to name your estate as the beneficiary, this removes the contractual advantage of naming a real person as beneficiary and then subjects the life insurance proceeds to the probate process, or the official proving of a will. This process can be timely and heavily contested, depending on circumstances.

Aside from the additional time required to settle the affairs of the estate and distribute the assets in accordance with the wishes of the deceased, the financial repercussion involves increasing the estates value, and potentially subjecting your heirs to high estate taxes.

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What Is A Death Benefit

The death benefit from a life insurance policy represents the amount paid to the beneficiary of the insureds life insurance contract. At the insureds death, the death benefit transfers to the policy beneficiary/.

Alternatively, a death benefit also accrues in the situation of an annuity or pension-holder dying with payments still left on the financial instruments. In other words, the stream of payments received from the annuity or pension-holders account will continue to pay after the death of the primary individual.

Using Life Insurance Trusts To Avoid Taxation

How To Invest Life Insurance Proceeds (In 2021)

A second way to remove life insurance proceeds from your taxable estate is to create an irrevocable life insurance trust . To complete an ownership transfer, you cannot be the trustee of the trust and you may not retain any rights to revoke the trust. In this case, the policy is held in trust and you will no longer be considered the owner. Therefore, the proceeds are not included as part of your estate.

Why choose trust ownership rather than transferring ownership to another person? One reason might be that you still wish to maintain some legal control over the policy. Or perhaps you are afraid that an individual owner may fail to pay premiums, whereas in the trust you can ensure that all premiums are paid promptly.

If the beneficiaries of the proceeds are minor children from a previous marriage, an ILIT will allow you to name a trusted family member as trustee to handle the money for the children under the terms of the trust document.

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Who Claims The Death Benefit

The beneficiary of the policyholder claims the death benefit. The beneficiary receives the full amount of the death benefit unless there are multiple beneficiaries. In that case, the policyholder typically specifies how much money each beneficiary will receive. Its also the beneficiarys responsibility to file a claim after the policyholders death.

Who Can Be A Life Insurance Beneficiary

Almost anyone can be a life insurance beneficiary, including people, organizations and trusts. Here are some common examples of life insurance beneficiaries:

  • A person, like your spouse.

  • Multiple people, like your children.

  • A trust.

  • A charitable organization.

  • A legal entity, like your company.

Some insurers place limits on how many beneficiaries you can name. If your policy has a limit, be selective when compiling your list.

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Best Ways To Manage Life Insurance Proceeds After A Spouse Dies

By Kerri Fivecoat-Campbell, Next Avenue Contributor

I handled all the household finances and bills throughout my 32-year-marriage to my husband, Dale. But when he suddenly died of a massive heart attack at 57 last year, I was so traumatized by the loss, I couldnt think clearly about managing his life insurance proceeds. In an instant, I had more cash rolling in from it than either of our incomes had ever produced.

Luckily, I have a family member whos a finance expert. He helped me make key decisions about how best to handle the money. That meant figuring out things like what debt should be paid off, how much to leave in liquid assets and setting up a budget.

But not everyone has someone like that. If you dont, heres what I suggest you do if you find yourself needing to manage life insurance proceeds after the death of a spouse.

Also on Forbes:

Find an Expert

The first thing to do: find an expert.

If you dont have a friend or family member with a track record and credentials for handling finances, hire a Certified Financial Planner skilled in handling life insurance proceeds or one whos experienced in consulting with people in life transitions, says Kathleen Fish, a CFP at Fish & Consultants in Memphis.

But do it quickly.

If people come to us before making financial mistakes, we can help them, says Fish. There have been so many cases where people have come to us after its already too late.

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Do You Have To Pay Taxes On A Surrendered Life Insurance Policy

While you may receive less in value by surrendering the life insurance policy, you will not lose the tax free status of the life insurance proceeds. Fortunately, the IRS does not assess any tax on the cash value of a policy and when you withdraw money up to your cost basis, this money also avoids taxation.

Further, should you opt to take a loan against your life insurance policy, you will not pay taxes on these funds as they do not constitute taxable income. However, in the event your policy lapses, you must pay income tax on your entire gain related to the life insurance policy.

How To Find Out If Youre A Beneficiary And File A Claim

When someone buys a policy, they should try to make it as easy as possible for the life insurance company to identify each beneficiary when it comes time to pay out death benefits, which could be years or decades down the road. It really isnt enough to provide a beneficiarys name, because people can and do change their names over time. Ideally, the policyholder will have provided the following identifying information for each beneficiary:

  • Full name, correctly spelled, including any middle names
  • Any maiden or former names
  • Date of birth
  • If not a U.S. citizen, their nationality and passport number

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Childcare Or Dependent Care

Parents can spend more than $233,610 raising a child through age 18. If the policyholder left behind any children or grandchildren, the death benefit can be put toward daycare, school tuition, after-school programs, or any other necessities.

If the primary earner of the household dies and the spouse left behind needs to either return to work or work more, then the cost may be best used toward child and home care. The same is true if a stay-at-home parent dies.

The death benefit can also be used to care for aging parents or any other dependents.

Are Life Insurance Proceeds Subject To Creditors

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In general, when a life insurance policys proceeds pay out, these proceeds usually only become taxable when the policy holder names his or her estate as the beneficiary.

In the event the policy holder named another person as the beneficiary, these policy proceeds will be exempt from the policy owners creditors unless the death benefit proceeds revert to the deceaseds estate.

However, in the event the beneficiary has money owed to creditors, these life insurance proceeds do not automatically become exempt from creditors, unless the state has specific state protection laws in place.

If you purchased a term life insurance policy through a company like Fabric and named a beneficiary who is not your estate, a minor, or otherwise disqualified from having these life insurance proceeds avoid taxation, you will not have the proceeds go to a creditor.

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Six: Protect Your Business

As a business owner, you have a lot to protectyour business, your employees, and your family. If one of your partners or key employees dies or becomes disabled, there needs to be as little impact to your business as possible. You also want to attract and retain top talent.

Permanent life insurance can help with business continuation when a partner or key employee dies. It can also help facilitate the exchange of business ownership in the event of your or a partners retirement, disability, or deathwithout depleting the business capital. Permanent life insurance can be used to fund non-qualified retirement plans. Term policies can also be used to help protect your business.

When Does It Make Sense For A Trust To Own Your Life Insurance Policy

Estate planners and insurance professionals often recommend that people create a separate trust to own life insurance policies. Whether a life insurance trust makes sense for you depends on your goals and a number of other factors.

Why own life insurance in a trust?

If you own a life insurance policy, you probably know that the beneficiaries youve named to receive the insurance proceeds when you pass away get that money income tax-free.

However, payout on a life insurance policy may not be exempt from estate tax, which is why planners often recommend that a trust own your life insurance policy instead of you owning it.

If youre married and you name your spouse as the beneficiary of a life insurance policy that you own, theres no estate tax on the insurance proceeds when you pass away because the payment to your spouse qualifies for the unlimited marital deduction from estate tax.

How it works?

Existing insurance: If you already own one or more life insurance policies, you can change ownership from your name to your insurance trust.

First, you would work with an estate planning attorney to create the trust document. Youll want to consider who will act as trustee of the trust and under what circumstances your beneficiaries will have access to the insurance proceeds.

There are two wrinkles, however:

The mechanics

  • Premium notices will be sent to the ownerin this case the trustee or trustees.
  • Make sure the trustees let you know when they receive a premium notice.
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    When Can A Life Insurance Company Refuse To Pay Out The Death Benefit

    While a life insurance policy pays out for most causes of death, there are a few caveats:

    • The contestability period: The first two years your policy is active, claims can be reviewed by the insurance provider and denied if the policyholder lied on their application. Claims can also be denied after contestability ends if lies are found.

    • The suicide clause: Insurers will deny the death benefit if a policyholder dies from suicide within the first two or three years their policy is active.

    • Murder: Policies donât pay out if the policyholder is murdered and the beneficiary is implicated in the policyholderâs death.

    • Policy lapse: If the deceased fell behind on policy payments, their coverage will have lapsed and is no longer active.

    How you spend the funds from a life insurance claim ultimately comes down to your financial needs. A young surviving spouse may need the funds to support a child, whereas an older spouse may simply use the payout to support their retirement. A licensed financial professional can help you spend the funds wisely.

    How Long Do You Have To Claim Life Insurance

    What Should A Widow Do With Life Insurance Proceeds?

    Well be honest: Filing a life insurance claim is important, but it probably isnt at the top of your to-do list immediately after a loss. You need time to grieve before you can put one foot in front of the other and take steps toward the future. And thats okay.

    Theres no time limit to claim life insurance, so you can file whenever youre ready. That said, your loved one left this money to take care of their loved ones. There will be costs coming up that need to be paid, and the life insurance payout will help cover those costs. Thats the legacy this person left to you. So its best to honor their intentions and file the claim as soon as you can.

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    Which Life Insurance Payout Option Is Best

    Life insurance can help your family cover your final expenses and fill a financial void if you pass away. There are different types of policies to choose from, and you should work with a financial planner to determine how much you need.

    Also, be mindful that your beneficiaries will have the right to decide how they receive the death benefit. So, it’s ideal to have a conversation about life insurance payout options with your beneficiaries to ensure they understand the options available to them and can make an informed decision when the time comes.

    Are Life Insurance Proceeds Taxable A Complete Guide

    If you have the great fortune of holding down a job with fringe benefits like paid sick time and vacation, and health coverage through dental, vision and health insurance, you might also carry another benefit: group-term life insurance.

    Most employers who offer fringe benefits with this option usually provide discounted coverage through a partnering insurer as a baseline and then the add-on possibility of carrying more to suit your needs. Further, options exist for purchasing your own life insurance policies directly through life insurance companies.

    While insurance through your employer or also through your own policy purchased directly through an insurer provides for better financial security, Uncle Sam also has a vested interest in taking his fair share of any such benefit. And if you paid taxes on the front end for this benefit, it begs the question are life insurance proceeds taxable?

    To illustrate, as a general rule, anything an employee receives from an employer as compensation for services rendered including fringe benefits of the likes mentioned above counts toward their gross income under the Internal Revenue Code , unless specifically excluded by some other section.

    In this case, IRC Section 79 provides such an exclusion, as discussed in more detail below.

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    Life Insurance Payout: How Does It Work

    10 Minute Read | December 30, 2021

    Grieving the death of a loved one is the hardest thing in the world. The last thing you want to do in the middle of it is stress over moneyand thats why your loved one had life insurance.

    But trying to collect on their policy can be confusing. If youre like most people, youve got questions like: How do I claim the life insurance payout? When will the money get here? How will the money get here?

    If youve experienced a lossor youre helping a loved one through their losswe are so sorry. This situation is devastating, and it sucks. But when you understand how life insurance payouts work, you can get the money you need to take care of yourself and your family during this difficult time. So lets get started.

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