facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog external search brokercheck brokercheck
%POST_TITLE% Thumbnail

Military Finances 101: The Insurance Triangle

Estate Planning

Life Insurance is Tax Free

I don't know how many times I've heard that life insurance is tax free. That's not entirely true. Life insurance proceeds are income tax free, but they can be subject to estate tax at either the Federal or State level. But, if the deceased didn't own the life insurance policy, it isn't part of his or her estate. And that can be a good thing. You can also mess things up.

Military Officers Need to Understand the Insurance Triangle

There are three "parties" to an insurance policy in addition to the insurance company. They are:

  • The policy owner.  This is the person who is required to make the payments
  • The insured. When this person dies, the death benefit is paid.
  • The beneficiary. The person (or potentially persons) who receives the death benefit.

While there are three parties mentioned, in order to avoid potential tax problems, no more than two people or entities can occupy the three positions. For instance, the policy owner and insured can be the same person and the beneficiary is a second person. Or, the policy owner and the beneficiary can be the same person and the insured can be a different person. It wouldn't make sense for the insured and the beneficiary to be the same person.

It is important to note, that if someone has an insurable interest in another person, he or she can purchase a life insurance policy on him or her. A classic example of this would be a divorced spouse that relies on alimony from an ex-spouse. This would be an insurable interest and the divorced spouse can purchase (and pay for) an insurance policy on his or her ex-spouse without the ex-spouse's knowledge or approval.

By making the owner and beneficiary the same person, the insurance proceeds are not included in the insured's estate on passing.

Three is a Crowd

If there are three different people in each of the three positions, there is a problem. Since the beneficiary is not the owner of the policy, the death benefits will be considered a gift (potentially taxable) from the policy owner. Additionally, if the insurance premiums exceed the annual gift tax exclusion, then they could be considered a taxable gift as well.

Don't Make Un-Forced Errors

With proper planning and use of tools like insurance trusts, you can remove your life insurance proceeds from your estate and avoid the insurance triangle.  A Financial Planner or Estate Planning Attorney should be able to help you make sure you don't make any mistakes.


Disclaimer
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.