Life Insurance Tax

A lot of questions have been asked about whether taxes are paid on life insurance claims; well this doesn’t come through as direct an answer as one would expect. There are two important terms one should first familiarize with first before you can arrive at the answer. We would try to differentiate them, and then we can then go on. What is Life insurance interest and how does it differ from life insurance benefits?

Life Insurance interest is any excess amount paid over the Insurance cover amount or benefit as the casemight be, if for example the insurance cover is $78000 and eventually $80000 was paid, then there is an interest of $2000 which is subject to income tax. But Life insurance benefit which is the amount meant to be paid and in the above example is the $78000 is not taxable. In the first place, you do not need to fill it in your tax return.
However, there is what we call estate taxes which applies in certain cases, if the policy owner takes out the policy in his name then when he dies the insurance benefits would be paid to the beneficiary who might be his spouse or children but it is saddening to note that there is an estate tax charged on the benefit paid out and in most times would reduce the amount paid to the beneficiary from the original amount insured by the policy owner. Imagine your spouse being paid $3m out of $3.8m just because the estate tax has been deducted and this leaves a critical question of what then is the need for insurance, when a great chunk is going back to the Inland Revenue? Some people really don’t flow with the idea of insurance before, now having to think of the greater part of their savings into insurance going to the Inland Revenue Service could find it discouraging.
What then can be done?
There is no cause for alarm as the only so far preferred bypass and solution to ensuring your beneficiaries get what you actually provided for them when you are gone is the irrevocable life insurance trust

How does it work?
Simply create the policy, and then name a trustee-most times spouse or siblings. These would be the beneficiary of the trust, you will name the trust as your beneficiary after you die but note that it must be at least 3 years before you leave for the great beyond. The benefits would be passed on to the trust when you die and then the trust would hold it for the trustee who would eventually benefit. In this way no tax would be paid on your dividend and your surviving defendants can get all they need. Please be careful and know that you who created the trust must have given up your rights to the trust and also name the trustees as your people in your family.
I want you to know something important that prudence is really an attitude of the rich in mind, why waste money trying to be wise- This is just a perfect way not to lose your hard earned money to tax payment, reducing the satisfaction and financial security you have toiled to have your Life insurance beneficiaries have especially your children and your spouse.