Every year, we get a lot of questions about life insurance payouts and how taxes are going to impact the payout from the plan. When you’re looking to purchase life insurance coverage, it’s vital that your family has what they need.
At MillionDollarLifeInsure.com, we know that purchasing life insurance is not a task that you want to do, but that’s why we are here to help.
It’s our mission to ensure that you’re getting the best life insurance protection available.
When it comes to taxes, most people have terrible feelings towards taxes and they try to avoid them at all costs (legally, of course).
This article is going to help decipher the confusing relationship between taxes and life insurance. Don’t be scared, it’s not as bad as it sounds.
Taxes On Life Insurance
We all know that taxes can be confusing. In fact, most people have a minimal idea of how taxes work. When you’re purchasing life insurance, it’s important that you consider all of the factors that are going to impact your life insurance coverage.
One of the most common questions that we get is “how much of my life insurance is going to be taken out of taxes?” The answer isn’t as simple.
Several kinds of taxes could be taken out of your life insurance benefit.
You have federal income tax, state income tax, and your estate tax. The amount of taxes that are going to be taken out are going to depend on how the beneficiary of the plan chooses to receive the benefit as well as the value of your estate.
In most cases, the beneficiary of the life insurance plan is going to receive the payout in a lump-sum, which means that they are going to get all of that money at one time.
In these cases, the payout is not going to be taxed by federal or state income. In fact, in the vast majority of cases, your family won’t be required to pay any taxes on the payout for the life insurance coverage.
Yep, you heard that right, your family probably won’t have to pay taxes on the payout.
One situation in which your family will have to pay taxes on the payout is if they decide to get the money in annual payouts instead of getting the money as a lump sum.
Depending on the insurance company, some of them will pay interest on the money while they are holding the remaining balance. Your family will have to pay taxes on the interest that is earned because it’s deemed as income.
Any interest that they are paid, they are going to takes taxes out of.
This is why we RARELY advise beneficiaries get the money in payouts. It’s almost always a wiser choice to get all of the money in a lump sum.
Another circumstance in which the payout is going to be taxed is if the value of the estate is worth more than $5.43 million dollars.
If you passed away, and all of your possessions and worth equaled more than $5.4 million dollars, then your family is going to have to pay estate taxes. Depending on the value of your estate, your family would owe $200,000 or more to the IRS.
There are some ways that you can avoid paying estate taxes, but we won’t get into those techniques in this post.
How Much Life Insurance Do You Need?
Aside from having a life insurance plan, it’s vital that you give your family enough insurance coverage for all of your debt, to provide an income to your family and to pay for all of your final expenses.
Taxes are one portion a lot of people forget to account for, which can throw off the whole calculations. If they have to pay estate taxes, it throws a wrench in the whole operation. Forgetting to add in taxes can leave them thousands of dollars short.
Maybe you won’t have to pay any taxes on your inheritance, maybe you will. You need to know exactly how much you’re going to have if something happened. If you want to clear it up, we recommend setting an appointment with a financial expert.
There are a couple of key categories that you should consider when you’re shopping for insurance.
Primarily, a life insurance policy is supposed to provide your family with the money they need to pay bills that they are now responsible for. Make sure that your policy is large enough for your family to pay off any debt that you would leave behind.
When we work with our clients to help them calculate, we tell them to start with their biggest debts (usually mortgage) and work their way down. Start big and work your way down.
We also tell our clients to include EVERY debt.
If you’re the mainstream of income in your family, then to avoid any hardships your family may have without that money, you need a life insurance policy. It will give them the funds needed to pay for any necessary expenses.
The older your children get, the fewer people you’ll have who rely on your paycheck. If your spouse has a job, then this may not be a huge portion of your life insurance needs.
The last number to put into the equation is any final expenses that your family would be responsible for like funeral expenses are burial related costs. The average funeral costs around $10,000, which can be difficult for a grieving family to cover. Your life insurance plan will give your family funds needed, without having to drain their bank account.
After you’ve calculated how much coverage you need (included possible taxes), your jaw might hit the floor. Don’t worry, the plan won’t drain your life savings.
There are plenty of cheap life insurance options, even if the plan is well over a million dollars. The only thing worse than paying taxes on a life insurance policy is not having a plan in place at all.
Life Insurance And Taxes
If you want to ensure your family won’t be strapped with massive estate taxes or any additional taxes when they receive your insurance policy, we highly suggest consulting with a financial advisor or tax professional.
If you need help finding a life insurance plan to protect your family members and their finances, call us today. We can bring you options to browse through.
We’ve helped hundreds of clients find a plan they can afford. After a few simple questions, we can get you started towards a quality insurance plan.
You have two options for your next step: you can fill out the quote form or you can use your telephone to call us. Either way, you’re getting access to our professional agents with years of experience.
If you’re still wondering about the taxes or you’re looking for affordable million dollar insurance, go ahead and let us know. We have years of experience working with applicants of all kinds.