- Cape student sues, accuses school officials of slamming her to ground multiple times (04/28/16)47
- Neelys Landing man shot, killed by highway patrol trooper after traffic stop (05/01/16)43
- Bob Evans restaurant in Cape Girardeau among chain's 21 closings (04/26/16)9
- Missouri House votes to allow concealed weapons without permits (04/28/16)8
- Police report filed, but no charges in incident at Cape Central (04/29/16)40
- 2016 All-Missourian Boys Basketball (04/29/16)
- Statement: Man says cops’ good work drove him to grow his own marijuana (05/01/16)1
- Two hurt in motorcycle wreck on Interstate 55 (04/25/16)1
- Senator introduces bill for I-57 that would connect Sikeston with Little Rock (04/28/16)4
- River Ridge Winery changes hands (05/02/16)
Stanley - On the tax edges of life
Life's only certainties, so goes the saying, are death and taxes. Life insurance policies not only help cushion against the economic impact of the former, but may also offer the auxiliary benefit of providing assets to pay for the latter. That's why if you or those close to you own life insurance, you should be well aware of the tax advantages it may offer under certain scenarios.
At its essence, life insurance is purchased for the death benefit it provides, but it can also be a versatile financial tool. With the assistance of a licensed financial professional, life insurance can be used to meet a wide range of financial needs and objectives, both personal and business-related. For example, depending on circumstances, both permanent and term insurance can address diverse purposes in the event of a death- from providing income assistance for families, to allowing small businesses to carry on, to assisting the conservation and timely distribution of an estate.
One of the major tax advantages of life insurance is that beneficiaries generally receive death benefits free from federal income tax under Section 101(a) of the Internal Revenue Code. Those proceeds may add much-needed cash to an estate settlement, allowing survivors to pay estate taxes without being forced to sell off assets they'd rather not. And if ownership of the policy is held outside the estate - in an irrevocable life insurance trust for example - proceeds are not subject to estate tax either.
But there are other tax advantages to owning permanent life policies that can be realized prior to the death of the insured. For instance:
-- The cash value of a permanent policy may grow income tax deferred. Policy owners may be able to access the cash value via policy loans or withdrawals, generally income tax-free, as long as they don't receive more than the policy basis -- generally equivalent to the amount they've paid into the policy. Keep in mind that withdrawals and loans will reduce policy values and the death benefit, and may have tax consequences, so it is wise to consult your tax advisor for advice regarding your particular situation.
-- If you decide that your permanent policy is no longer required -- perhaps a mortgage has been retired or a college education paid for -- you can access cash values, as discussed previously. Or if you wish to surrender the policy, tax will only be due on the amount that exceeds the basis of the policy. If your policy is a modified endowment contract (MEC), loans are taxed as distributions and taxable distributions prior to age 59 1/2 may be subject to a 10 percent federal income tax penalty. Withdrawals and loans will reduce policy values and the death benefit and may have tax consequences.
-- Many policies include a Waiver of Premium provision that provides for premium payments to be made as long as the policy owner is disabled as defined in the policy. All premium payments made into the policy under this provision would be tax-free. Premiums payments made under the disability provisions are not included in the policy owner's cost basis. In addition the amount paid for the Waiver of Premium option is not included in policy owner basis.
-- If your policy includes a "living needs benefits"* clause or rider, be aware that the Health Insurance Portability and Accountability Act of 1996 changed federal tax law to allow "terminally ill" individuals to receive death benefits from their life insurance policies free of federal income tax. In addition, if certain conditions are met, a "chronically ill" person may also receive accelerated death benefits federal income tax-free.
* New policies must meet certain face amount requirements before the Living Needs Benefit will be added to the policy. When a claim is paid under this rider, a discount for early payment is applied and a $150 processing fee is deducted. Each additional policy used for the same claim will have a processing fee of up to $150.
Receipt of accelerated benefits may be taxable; assistance should be sought from a personal tax adviser. Receipt of the accelerated death benefit may affect eligibility for public assistance programs.
Sharon Stanley is a representative of The Prudential Insurance Co. of America in Cape Girardeau. (334-2603 )