Posted by Life insurance claimsNo tax issues seem to have become common sense*.Under normal circumstances, claims on life insurance contracts are tax-free(Detailed description).
However, when many families or companies apply for a life insurance policy, they make the life insurance policy contract into a "defective" triangle policy without knowing it.to make insurance claims,Lost the advantage of being exempt from income tax.
The Life Tank©️ invited life insurance columnists Heather Xiong CFP®️, In this article, I share the common "defects" and consequences of triangular insurance policies in the process of applying for life insurance, and how to remedy them.
The Life TankWhat is the life insurance triangle problem?
In the process of applying for life insurance, we have to fill in three important roles, they are:
- title owner of the policy(also called holder)
- the person protected by the policy(Also called Insured/Policyee)
- beneficiaries of policy claims
You can click "Life Insurance Academy | What is life insurance" for more detailed instructions.
When the three roles are different people or institutions, such a policy becomes a "triangle policy".
One of the most common cases is,The husband buys life insurance for the wife (or the wife to the husband), and the beneficiaries are set to the children.This forms the triangle policy.
Tax issues facing Triangle Life Insurance
For triangular life insurance policies for families in the United States, when the person protected by the insurance, the insured, dies, the insurance benefit will be considered a gift and will be taxed.
Specifically, Mr. Zhang insures his wife, Miss Li, a life insurance of $100 million, and the beneficiary is the children.After Miss Li's untimely passing, the $1,000,000 will be considered a gift from Mr. Zhang to his children.Therefore, this claim is subject to an additional high gift tax.
Take the 2022 gift tax from parents to their children as an example, the portion over $16,000 will be taxed.
And I think that's a departure from the design that life insurance claims are tax-free.
How do I fix a policy with a triangle problem?
A neat fix,It is to set two of these three roles to the same person or institution.
one of the solutions
Let us compare the triangular principle of life insurance. Taking the above family as an example, as long as Miss Li is the owner of the property rights of this policy and the insured of this policy, we will avoid it if the beneficiary remains unchanged. potential problems with this triangle policy.
If Miss Li passes away, the children receive this tax-free life insurance benefit.This fund can be used at full discretion for purchasing a house, living expenses, education, etc.
However, in reality, the situation will be more complicated. Different families have different stages of financial life. In practice, they usually face many practical problems.
I summarize,For families, to avoid the triangle policy problem, we need to set two of the three roles in the policy contract to the same person when applying.As for the triangle of corporate purchases and executive benefit policies, I'll address that separately in a later column. (End of full text)
(>>>Related reading:Who is your favorite institution to buy life insurance?The answer is beyond your expectations )
*This article is not tax advice, we recommend consulting your tax advisor to discuss specific tax issues
