Wednesday, 9 November 2011

Common Life Insurance Traps And How To Avoid Them

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Beware of these common pitfalls that life insurance can reduce your value to your family ... or allow the payment of compensation to the IRS.

Trap: With life insurance too long. To work over the years and a family, you probably have a lot of life insurance to protect your family against the possible loss of your income.

But like his approach more years - with her children grow, the mortgage and retirement accounts funded paid - Your insurance can be greatly reduced.

For many, the justification for owning life insurance is to pay estate taxes. However, this requirement has been reduced in recent changes in tax laws, the mass and the amount of the gift tax for individuals to raise $ 1 million exemption.

After payment protection insurance unnecessary past the possibility of higher yielding assets to acquire.


Check your insurance needs based on changes in their personal circumstances and their inheritance tax exposure. If you find that you are getting the hint ..

* Exchange rate of life insurance policies issued on a tax-deferred annuity from an insurance company to get a better return. This can be organized through a tax-free exchange, whereby any taxable gains from the sale of the insurance policy.

* The gift of your insurance policy to charity. You receive a tax deduction for the costs under the policy, the premiums you have paid.

* Enter a political gift for your child or grandchild. The advantage of the policy is tax-free to the recipient, the child and provides valuable benefits to financial security. The gift will also remove your taxable estate policy, assuming you survive three years after the donation.

You can avoid paying gift tax on the transfer of your annual gift tax exclusion (currently $ 10,000 per recipient, or $ 20,000, where donations are made by a couple) and, if necessary, with a portion of your property and the amount of gift tax exclusion .

* Enjoy the policy. This money is in your pocket, but you will the tax base to the extent that the amount of the police as to what he realized get paid by premiums.

Estate Planning Tax: If you find that you still need life insurance to cover the possible find Erb, you should use a second order policy that covers you and your spouse and pays benefits on death of the victim die.

The estate tax marital deduction, all assets of a spouse estate tax free to the surviving spouse, making it the death of the surviving spouse's tax liability on the death of the couple is due to password.

A second, can die policy funds for a tax bill that significantly lower cover the cost of the goods purchased two insurance policies on each spouse separately.


* With insurance on your own life. This may be the insurance benefits are subject to estate tax at rates up to 55%. Because if you have a policy on his own life income in your taxable estate include the

Avoid this trap by the beneficiary of the insurance that you have, or the creation of a life insurance trust to support the policy and distribute the product to your specifications.

You can always pay the premiums for the policy, donations to the contractor (or trust beneficiary) with its annual gift tax exclusion for tax havens gifts.

Advantage: With his life insurance, which is the beneficiary of the insurance holding tax-free property.

The mistakes to avoid ...

* With insurance on your own life, and you name your spouse as the beneficiary. Insurance benefits escape inheritance tax his death because of the unlimited marital deduction - but if her husband dies ownership, the product may be taxed in his / her heritage.

* Possession of a life insurance a person and the appointment of a third party beneficiary.

Example: One spouse has a life insurance on the other spouse, and the names of a child as a beneficiary.

The catch is that because the owner of the control strategy beneficiaries pay the benefit to the recipient is a taxable gift by the contractor received.

Also avoid this trap beneficiary of the life insurance policy or a life insurance policy in trust.

Important: If you define a life insurance trust to his own insurance, make sure that the trust developed by an expert in the field. Trust documents, non-specialists are made easily confused contain profanity, not the technical requirements, which the trust fails.

* Borrowmg against life insurance. It can be tempting to borrow against life insurance because the loans can be a source of money tax-free and low interest rates.

But some of the pitfalls of borrowing against insurance lead ...

* If you borrow against the insurance company reduced the insurance benefit for any insurance, so that they more exposed to financial risk families.

Dangerous Scenario: In general, interest on a loan against the insurance is not paid in cash but will be deducted from the policy. If the loan is not repaid, and the compounds of interest can reach the loan equal to the value of the policy. Then the policy will end, and you get the tax base in the amount of the loan is not paid (a "forgiveness") minus your basis in the policy, despite receiving no cash needed to implement payment of income taxes.

* If you borrow against the insurance company and then transfer the contract to another person for the benefit of the policy are subject to income tax.

Why, if a policy was loaned by gift, the recipient will have purchased the policy as to the outstanding loan obligation with the amount of the loan is to accept the purchase price.

And by the Tax Code, the purchase of an insurance benefit from the current political life is taxable income to the purchaser if the purchase price is higher than the base of the dispenser in politics.

Example: A father has his own life, which has a cash value of $ 100,000 to $ 500,000 insurance policy on his /. It has a cost basis of $ 60,000 in politics. He borrowed $ 90,000 from the cash surrender value of the policy reduced to $ 10,000 then made a gift of a child policy.

The result is that the child shall have acquired as the policy to take over the loan obligation of $ 90,000. Therefore, this policy, the $ 410,000 income tax base for the child when paid rather than tax-free.


© 2011 Life Insurance - Designed by Rashid Khan