Follow These Three Steps to Keep the IRS Away From Your Life Insurance Proceeds



Having a life insurance policy is a must for anyone with a family that relies upon their income. For some, if you were to die without a life insurance policy to protect your family, they could very easily find themselves in an overwhelming financial crisis.


An appropriate life insurance policy works to ensure that your family’s financial needs, from everyday living expenses to the future college tuition of a child, will be covered should you pass away.


When a life insurance policy is set up correctly, the death benefit is paid to your heirs’ tax free.  Unfortunately, even the smallest of error or oversight can lead to heavy taxation.  Follow these three simple steps to ensure your money ends up where you intended it to.


1. Never name your estate as your beneficiary.


Upon your death nearly everything you own is subject to the federal estate tax. When you name your estate as the beneficiary on your life insurance policy you are increasing the value of your estate.  If your estate exceeds the federal estate tax exemption, it will be subject to estate taxes.  If your estate is subject to the estate tax, the death benefit from your life insurance policy will also be taxed, which may lead to you heirs receiving only a percentage of the money.


When it comes to naming a beneficiary of your life insurance policy, make sure to pick an actual person, make sure you have and keep all their contact information current, and review your decision annually when you meet with your independent insurance agent.


2. Have at least three beneficiaries.


I realize the thought of naming three or more beneficiaries seems excessive, but it is the safe thing to do.  After all we are talking life insurance; we don’t exactly go for exciting!  Why name more than one beneficiary you ask?  Let’s imagine that you and your beneficiary are driving, you get into an accident and you both die.  What happens to your life insurance proceeds?  They are paid to your estate.  And what happens when a life insurance policy is paid to your estate?  It is subject to taxation.  How do we keep that scenario from happening?  We name multiple beneficiaries.


See how reasonable having multiple beneficiaries seems now?


3. Be careful naming a charity a beneficiary.


A new marketing trend within the life insurance community is to encourage people to name their favorite charity as the beneficiary.  You will want to consult a CPA or tax professional on this one in order to avoid gift taxes being taken on the amount of the gift.  If not set up correctly, the gift will be subject to heavy taxes, or the proceeds may even be reverted back to the estate, where it will be subject to estate taxes.


If you want to leave money to a charity, do so through your will, but leave the life insurance beneficiary as an actual person.  It will save your family time, energy, headaches during an already trying time.


Contact us to see if you can save money on your insurance by speaking to a professional independent insurance agent at Journey Insurance.


Let us sift through the hundreds of insurance programs to find you the most competitive rates available.  Let us do the paperwork while you spend your time doing something you actually enjoy!


Journey Insurance Agency * Irvine, California * 888.323.7480





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