Life insurance is a valuable and versatile financial tool that can help you deal with a variety of financial problems. With its unique combination of tax and non-tax benefits it can be a great tool for protecting your financial future and strengthening the financial security of those you love.
Because of its versatility and flexibility, life insurance can be used to meet a wide variety of financial needs.
Offsetting some of the pain of death
When most people think about dying unexpectedly, one of their biggest concerns is for the family members they leave behind. No one wants financial problems on top of emotional devastation. Life insurance could provide your family with money for a stable financial foundation. Life insurance death benefits can help cover some or all of the medical and legal costs associated with dying. If you owe money to others, death benefits may provide the cash needed to pay them. If you’re a single parent, the benefits could provide the guardian you selected for your children with the money they need to continue raising your children. Death benefits could also provide the cash needed to pay some of the bequests and charitable provisions in your will.
Protecting your family
Your home is probably one of the most important places for your family. Life insurance may provide the funds to pay outstanding mortgage installments and keep your family in the home they love.
If you have a child with special needs or a life-altering condition, death benefits may provide extra dollars to secure their financial future without adversely impacting your other children. Life insurance can also help pay your children's education expenses if you were to die early. Sometimes it’s difficult to divide an estate equally. Your death benefits could create the additional cash needed to make sure each of your children receives an equal estate value, even if what they receive is different.
What about the inevitable taxes?
Your estate could be responsible for a surprising variety of taxes to the federal, state and county governments. Fortunately, life insurance benefits can help provide the money to pay these taxes or can reimburse someone else who pays them.
Stay covered - in life and death
In addition to providing income tax-free death benefits1, cash value life insurance policies can provide benefits to policy owners while they are alive. A properly funded and well-managed cash value policy can be a versatile financial asset with the potential to provide financial flexibility and income tax free2 cash flow during retirement. Some states allow life insurance policy owners another valuable benefit: creditor protection. Because death benefits are often used to maintain the financial security of spouses and children, many states protect the cash value and/or the death benefit from the claims of creditors. Some insurance policies have another valuable feature: if you’re terminally ill and likely to die within six to twelve months, you could take some of the death benefits early. These payments are tax free, and can provide financial relief to cope with the expenses and emotional trauma of terminal illness.3
Benefits for your business
It doesn’t stop there. If you’re a small business owner, life insurance can help solve the problems that would occur if a key person in the business leaves or dies. Life insurance is frequently used to reimburse the business for the revenue and profits that can be lost with a key employee’s death. It can also provide funds to pay for locating, hiring and training a qualified replacement. Cash value life insurance can also be used to provide key employees with various non-qualified employee benefits. These are just some of the ways life insurance can help small business owners.
As you can see, life insurance can be a powerful tool for your estate and financial planning. As always, a financial professional will be happy to help you as you plan for your family’s financial security.
These materials are not intended to and cannot be used to avoid tax penalties and they were prepared to support the promotion or marketing of the matters addressed in this document. Each taxpayer should seek advice from an independent tax advisor.
Securities and investment advisory services offered through Voya Investment Advisors, Inc., member SIPC.
1Proceeds from an insurance policy paid because of the death of the insured are generally excluded from the beneficiary’s gross income for income tax purposes under IRC Section 101
2Tax–free income is achieved by withdrawing from the policy cash value an amount equal to the total premiums paid (called the cost basis), then using policy loans for the balance. Outstanding policy loans at death, and withdrawals, may reduce the policy death benefit and cash values. If the policy is allowed to lapse with a loan outstanding, the amount of the loan in excess of your cost basis will be taxable as ordinary income to the extent of the gain in the policy. Early withdrawals may be subject to a surrender charge.
3Accelerated benefits may or may not qualify for favorable tax treatment under the Internal Revenue Code of 1986. Whether such benefits qualify depends on factors such as your life expectancy at the time benefits are accelerated or whether you use the benefits to pay for necessary long-term care expenses, such as nursing home care.
If the accelerated benefits qualify for such favorable tax treatment, the benefits will be excludable from your income and not subject to federal taxation. Tax laws relating to accelerated benefits are complex. You are advised to consult with a qualified tax advisor about circumstances under which you could receive accelerated benefits excludable from income under federal law.
Receipt of accelerated benefits may affect your, your spouse or your family's eligibility for public assistance programs such as medical assistance (Medicaid), Aid to Families with Dependent Children (AFDC), supplementary Social Security income (SSI), and drug assistance programs. You are advised to consult with a qualified tax advisor and social service agencies concerning how receipt of such a payment will affect your, your spouse and your family's eligibility for public