The Tax Benefits of Transferring Whole Life Insurance to Heirs

When it comes to the death of a spouse or loved one, there are many factors that play a role in how much is actually passed on to family members. However, it’s important to understand why life insurance can provide not only money for expenses, but also provide tax free distributions.

In the event of death, monies may be necessary to cover death expenses, provide income to support dependents until income can be replaced, or provide lifetime income.

Let’s take a look into some of these accounts and how they differ.

The 401k is the first financial account we want to look at. When the owner of a 401k dies, the beneficiary will have some options. However, none of these options will avoid taxes. If the beneficiary takes the money in a lump sum, he/she will be responsible for income tax on the whole. A spouse will have the option to roll the account into his/her 401k. This money takes on the same attributes as the spouse’s account, meaning age rules, early withdrawal penalties, and all other issues that are involved in utilizing a 401k. Children have fewer options.

IRAs have similar rules to a 401k, making them also not a great candidate for legacy transfer.

Savings accounts have already been taxed, and therefore will only be subject to income tax on the current year’s growth.

A whole life insurance policy will be the best account for legacy transfer. Not only does a properly structured whole life insurance policy provide a cash value for living benefits, but it will also have an associated death benefit greater than the cash accumulated. This death benefit will transfer tax free to its beneficiaries upon the death of that individual, giving life insurance much greater tax advantages over other alternatives.

This not only provides immediate income for expenses, because these dollars do not pass through probate, but will also provide dollars to help supplement income for the dependents of the deceased.

This is why life insurance becomes such a strong candidate for retirement savings, not only does it provide a high level of living benefits, but also provides the insured with a death benefit for his/her beneficiaries.

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