Life insurance products offer a variety of benefits beyond simply providing for your loved ones after your death, and it is worth some planning to ensure your insurance works for you and your heirs. Contact a qualified life insurance agent and tax preparer for advice before making changes to your current life insurance arrangements.
Estate Tax Planning
Life insurance benefits are not taxable to your beneficiaries, but they are counted as part of your total assets and might be subject to estate tax. According to the Internal Revenue Service (IRS), individuals who die on or after January 1, 2009 can exclude $3.5 million worth of assets from the estate tax. Once this exclusion amount is exceeded, a 45 percent tax rate kicks in. However, the exclusion amount will be reviewed by Congress in 2010 and might change.
According to SmartMoney, one way to protect your life insurance benefits from estate taxes is to have your life insurance policy purchased by an irrevocable life insurance trust. Because the trust owns policy, it does not become a part of your assets for estate tax purposes. If you already have life insurance policies, you can transfer them into an irrevocable life insurance trust, but for the estate tax implications to be eliminated, you must live for three years beyond the transfer date.
Long-Term Care
Life insurance can help pay all or part of the cost of the premiums to buy long-term care insurance, or to pay for long-term care directly. According to the Department of Health and Human Services, three options exist to use life insurance in this way: accelerated death benefits; life settlements and viatical settlements.
Accelerated death benefits let you receive a portion of your death benefit on a monthly basis before you die, tax free. Your policy will usually specify how much can be drawn each month for long-term care purposes, and it might limit the total payments to a percentage of the policy's death benefit. Any money you withdraw is deducted from the death benefit paid to your beneficiaries.
Life settlements allow you to sell your policy for its present value, with the purchaser becoming the beneficiary. Your policy may limit the age at which you can sell, but the funds can be used to pay for long-term insurance or care. Viatical settlements are similar to life settlements, except that they are only available if you are terminally ill. An insurance company purchases your policy, becoming the beneficiary.
Charitable Giving
MarketWatch identifies several ways you can use life insurance to benefit a qualified charity. Designate a charity as your beneficiary so they receive a payment on your death. You can give an existing life insurance policy with a cash value to a charity, and claim the premiums you've paid as a tax deduction. Or, purchase a new policy and designate the charity as the beneficiary. The charity can borrow against the policy, and each year, you can deduct the policy's premiums as a charitable gift.
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