Why is Life Insurance So Important?
There is seemingly no better way to provide a financial safety net for loved ones left behind than to have a valid life insurance plan. If you have a business or loved ones, there is almost no exception to needing a life insurance plan as part of your estate plan.
Income when your family needs it the most is one of the most appealing characteristics of having a life insurance policy. Whether your death is sudden or somewhat expected, your loved ones will be likely left with mortgage payments, funeral arrangements, possible medical bills, and maybe preserving a family business. The costs for these things can add up quickly and turn into an unnecessary crisis if not planned for.
Additional Benefits of LIfe Insurance Policies
Several policies offer additional riders that you can add to further tailor your policy to your needs and your family’s needs. Discuss these options and what may be best for your situation with your estate planning attorney to determine your best strategy.
Many plans also allow for a cash-value benefit. This can mean that if an unexpected expense arises, you may be able to access your life insurance policy’s cash value or borrow against it to cover the cost.
What Types of Life Insurance Policies Are Available In New York?
In New York and many states, there are typically two main options for life insurance: term or permanent policies or a combination of the two.
Term insurance provides a benefit and protection for a set amount of time. The terms can be as short as one year or up to 20 years and beyond. You also generally have the option to set it up so that it expires or ends upon reaching a certain age, such as 75 or 80.
Term Insurance plans can vary to include convertible terms, renewable terms, level or decreasing terms, or adjustable premiums. It is essential to discuss with your estate planning attorney what your goals are to ensure that you are choosing the right resource to achieve your goals.
Permanent insurance options are appealing as well for many reasons. Once the policy is in place, it is meant to remain permanent until death unless otherwise utilized.
A cash value can typically be accessed should the policy owner choose to cash out the policy before death. You can also usually make a loan against these policies, which can offer additional comfort and protection for families when faced with unexpected expenses.
Permanent insurance can be either interest-sensitive or traditional, and within those options are generally either fixed or variable options.
Are Life Insurance Proceeds Taxable?
The short answer is no. Life insurance policy proceeds aren’t typically included in gross income, and you don’t have to report them. However, there may be some exceptions. It is best to consult your accountant or estate planning attorney to ensure you follow all state and federal tax laws.
In many cases, the beneficiary of a life insurance policy (if they are the spouse) is exempt from paying state or federal taxes on the life insurance proceeds. However, it is essential to note that you may be susceptible to estate taxes based on the proceeds. You may also be subject to taxes on the interest if the proceeds are paid out over time rather than in one lump sum. If your relation to the deceased is not spouse, there may also be other requirements you must follow in reporting portions or all of the proceeds as taxable income.
There is an interactive tool on the IRS website that may be of interest to you. It walks you through an interview that can help you narrow down what to expect and be more prepared to discuss your questions with your estate planning attorney. Find the interactive tool here.
Is There a Way To Further Protect Me From Taxes From Life Insurance Proceeds?
You may want to consider creating an irrevocable life insurance trust. This resource entails creating a trust that funds and owns the life insurance policy, meaning that the proceeds may not be considered part of the insured’s estate.
This is highly appealing to many because if your circumstances align and the strategy is effective, you may be able to avoid estate taxes on the life insurance proceeds entirely, regardless of who is named as the beneficiary.
Again, with any of these resources, speaking with a trained professional is imperative. Rules and regulations on these resources change often, as do the IRS regulations. So, ensuring that your plan is as effective as possible for you and your family moving forward can be challenging. Leave it to the experts and work with an experienced and qualified estate planning attorney.
Don’t Guess With You Legacy
It’s not enough to hope you have all the right resources set up. With the ever-changing times and laws, staying current with something as important as your legacy can seem overwhelming, but we are here to help.
Our practice was founded in the late 1950s, and as a partner, I have been practicing law since 1988. I have worked with countless clients to ensure their wishes and goals are realized, even after they are no longer with us. I offer a specialized and custom approach to each client so we can address their specific concerns and needs.
Contact our office at (917) 920-6437 today to learn how I can help you protect your legacy and your loved ones. I look forward to serving you.