Comments on: Life Insurance Benefits Aren’t Taxed (Usually)

By: Evan

Evan — Sun, 10 Jan 2010 16:09:48 +0000

“I heard that death benefits are taxable if the payee doesn’t own the policy. In other words, if your adult child is the beneficiary of a life insurance policy that you pay for, she or he will have to pay income tax on it if you croak over.”

This is wrong – there may be gifting issues, but it depends who owns the policy (adult child vs. a for profit company).

I completely agree with on the SAHM issue.

By: Funny about Money

Funny about Money — Sat, 09 Jan 2010 20:51:45 +0000

I heard that death benefits are taxable if the payee doesn’t own the policy. In other words, if your adult child is the beneficiary of a life insurance policy that you pay for, she or he will have to pay income tax on it if you croak over. That may not apply to married couples, at least if you’re in a community property state; dunno, but might be wise to look into it.

Consider life insurance for your spouse, especially if she’s a SAHM. Price out what it would cost to put your kids in day care or have a caretaker in your home, to hire someone to schlep them to practices and other extracurricular activities, to clean house and prepare meals, and to run all the errands she’s doing while you’re at work. Now multiply that times the several years it may take you to recover from widowhood and find a new wife, add the cost of burial and the cost of therapy for yourself and the kiddies, and you’ve got the amount for which she should be insured.

By: mikestreb

mikestreb — Sat, 09 Jan 2010 00:41:06 +0000

That is great! Had my wife seen a book like that, I guarantee she would have said the same thing!!!

By: Evan

Evan — Fri, 08 Jan 2010 21:37:17 +0000

“I believe most of the people will not be subjected to IRC section 2042.”

Why? Because they won’t meet minimum thresholds of Estate Tax ($3.5mil in 2009; unlimited thus far in 2010)?

What about State Estate Taxes? 18 States and DC have them. In New York that amount is $1,000,000 in NJ it is $675,000

By: kosmo @ The Casual Observer

kosmo @ The Casual Observer — Fri, 08 Jan 2010 21:14:57 +0000

Correction: wife’s employer recommended using PRE tax money. Using after tax money is, of course, the correct method.

By: kosmo @ The Casual Observer

kosmo @ The Casual Observer — Fri, 08 Jan 2010 20:43:21 +0000

Mike – it wouldn’t surprise me if you coordinator was clueless.

My wife’s employer (thousands of employees) recommends, on their web site, paying for disability insurance with after-tax money “because it is unlikely you will become disabled.” Those are their words, not mine.

Yes, they’re suggesting that you save a few dollars a month in taxes now and possibly incur hundreds of thousands of taxes in the future.

My own employer smartly avoids giving tax advice – particularly bad tax advice.

By: CK

CK — Fri, 08 Jan 2010 18:01:53 +0000

I agree with Saladdin on this one.

By: NateUVM

NateUVM — Fri, 08 Jan 2010 15:26:30 +0000

I’m in the fortunate position of having a small life insurance policy on both my wife and my child through my employer, covered at no extra cost to me. Not sure how I would feel about paying for it, myself, as the benefit is for only $5,000, in each case, but I do know that I feel better having it. If either were to pre-decease me, I don’t know how much of a mood to coordinate expenses I would be in.

By: Frugal

Frugal — Fri, 08 Jan 2010 14:37:06 +0000

I believe most of the people will not be subjected to IRC section 2042.

Also keeping it simple, the interest in your post will be taxed as it is an income upon receipt and naturally, any asset owned (receivable in any capacity) should be included in the estate as long as you own it.

By: Shirley

Shirley — Fri, 08 Jan 2010 14:02:01 +0000

We took out Globe Life insurance policies for $5,000 for each of the grandchildren when they reached one year old. This was intended to help their parents with final expenses if the child were to die. At $20 per year, it’s a small price to pay for a certain degree of peace of mind and if it’s never paid out, so much the better.

By: Anonymous

Anonymous — Fri, 08 Jan 2010 12:56:31 +0000

Who pays the premium does help determine taxable status.

Surprises me. Cafeteria plans favor the business. They save on taxes etc… I wonder if your coordinator really understands how they work.

Funny story. I had printed off a “How Cafeteria Plans Work” booklet off the net this week and had it sitting on my table at home. My girlfriend walks by and says “Your work is getting a cafeteria?” I just looked at her and said “Not the food kind.”

She’s a good one.

saladdin

By: mikestreb

mikestreb — Fri, 08 Jan 2010 05:39:02 +0000

I had been told before by my company’s benefits coordinator that they won’t take out life insurance premiums pre-tax (cafeteria style), because if you use pre-tax dollars, the benefit is taxable….

Don’t know how much truth there was to that, but I elected to pay the tax on the $10/mo as to not screw up BIG time on the benefit…

By: Chris

Chris — Fri, 08 Jan 2010 04:48:30 +0000

I assume your coverage is minimal (funeral expenses) and if more than that you have beneficiaries depending on you?

By: Chris

Chris — Fri, 08 Jan 2010 04:46:29 +0000

Agreed, start a policy now while you are still insurable and have a current need.

By: Sheila

Sheila — Fri, 08 Jan 2010 04:32:04 +0000

After having my son experience this, I think it’s wise. Making financial decisions after a child has died is really tough–parents want kids to have the best funeral possible (in my experience), which is expensive. Our granddaughter’s funeral was about $10,000. My son had taken out a small life insurance policy much like the one you mention.