Life insurance and estate planning often go hand in hand. For many Georgians, it represents a considerable chunk of their estate, and it’s essential to make informed decisions about how to distribute it upon payout to benefit yourself and your loved ones. While the particulars may vary depending on your situation, we’d like to answer a few common questions that people have when considering purchasing and protecting a life insurance policy.
Are there taxes on life insurance benefits?
The short answer is probably not. However, future changes to tax law and some notable exceptions could impact the taxability of your estate and your policy. Let’s quickly break down estate tax vs. inheritance tax:
- There is no estate tax in Georgia; however, in 2022, federal estate taxes may be applicable for those making more than the existing 12.6 million threshold. Surviving spouses rarely use the entire estate left to them and often die with a more significant estate than the first spouse. If life insurance is part of that estate, prepare for it to potentially be taxed.
- Inheritance tax isn’t applicable in the state of Georgia; however, some states enforce inheritance and/or estate taxes, so make sure you’re informed about how this may affect you if you leave the state of Georgia.
An additional consideration is for those who wish to make a charitable organization the beneficiary of their life insurance policy. There are various reasons for choosing this route rather than designating your heirs as beneficiaries. Depending on your unique situation, there may also be tax benefits and implications, so make sure you discuss this with your attorney to help you make an educated decision.
Should I create an Irrevocable Life Insurance Trust?
An Irrevocable Life Insurance Trust (“ILIT”) is an additional trust you create as part of your complete estate plan. It is a separate trust that owns your life insurance, pays the premiums, and acts as your beneficiary.
Through an ILIT, owners of an estate can have peace of mind that their life insurance policy is protected.
An ILIT can
- Ensure that insurance proceeds aren’t taxed if your estate clears the taxable threshold.
- Give you complete control of the insurance proceeds received by the ILIT to care for your beneficiaries;
- Allow insurance benefits to be used for death expenses.
An ILIT is irrevocable and part of a separate trust you can’t easily make changes to once it’s set up. There are some general risks and complexities involved with an ILIT. We recommend that you consult your estate planning attorney to make sure you have made provisions to protect yourself and your loved ones.
What type of policy should I invest in?
There are two basic types of life insurance policies: Permanent and term life. Benefits vary depending on your financial situation, the value of your total estate, and the intended use of the policy.
Term life insurance comes with affordable fixed premiums paid during the coverage term (usually 10-30 years).
Permanent life insurance has higher premiums and combines an insurance policy with a savings plan. There are many different types of permanent life insurance policies. A knowledgeable insurance planning specialist can present all of the options to you. Generally, with permanent policies, policyholders can take the money out of their savings plan before their death to help with debt, retirement costs, etc.
Both types of policies are long-term investments, so it’s essential to speak with an estate planning expert and an insurance planning specialist early to understand the risks and benefits of the policies and which type will suit your unique financial needs best.
Bringing it all together
Have questions on life insurance options? Ready to discuss how to utilize your life insurance to benefit your overall estate plan? Reach out to the team at Smith Barid LLC today.