Life insurance is most commonly used to protect your family from any financial effects of your and/or your spouse's premature death. However, it can be difficult to think about or plan for such an event. And, unfortunately, adequate planning is often put off until it's too late.
Although it may sound simple, there are many things to consider. There are many ways to protect your family with life insurance. So, consulting with a life insurance professional can be vital!
Not Only For Family Protection
Life insurance planning is not only for those who support a family. There are several reasons for thorough life insurance planning. For example, have you recently purchased a new home? Have you recently been married? Have you made career changes? Other key purposes of life insurance include retirement and estate planning.
Life Insurance Proceeds & Taxes
Many people don't realize that even though life insurance death benefit proceeds should be paid income tax-free1 to the beneficiary(ies), there's a chance that such proceeds will be included in the value of the insured's estate, which may be subject to estate taxation.2
Employer-provided Life Insurance
People often make the mistake of assuming their employer-provided life insurance is adequate. However, employer-provided life insurance is typically equal to only one year's salary...far from enough for the family provider to protect his or her family adequately, and not enough for the average single person to repay any outstanding debts – often leaving parents and siblings dealing with such bills.
1For federal income tax purposes, life insurance death benefits generally pay income tax-free to beneficiaries pursuant to IRC § 101(a)(1). In certain situations, however, life insurance death benefits may be partially or wholly taxable. Situations include, but are not limited to: the transfer of a life insurance policy for valuable consideration unless the transfer qualifies for an exception under IRC § 101(a)(2) (i.e. the “transfer-for-value rule”); arrangements that lack an insurable interest based on state law; and an employer-owned policy unless the policy qualifies for an exception under IRC § 101(j).
2 The federal estate tax exemption amount is $3,500,000 in 2009. The highest federal estate tax rate is 45% in 2009. The federal estate tax will be repealed on 1/1/10 until 12/31/10. Beginning 2011, the federal estate tax will be reinstated with a federal estate tax exemption amount of $1,000,000 and a maximum estate tax rate of 55%. Congress continues to discuss and consider legislation that, if passed, could change the estate tax exemption and estate tax rates for 2010 and beyond.
For more information on this subject, and professional guidance in selecting the right kind and amount of insurance coverage, contact your insurance professional.
This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state or local tax penalties. This material is written to support the promotion or marketing of the transaction(s) or matter(s) addressed by this material. Pacific Life, its distributors and their respective representatives do not provide tax, accounting or legal advice. Any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
Pacific Life Insurance Company is licensed to issue individual life insurance and annuity products in all states except New York. Product availability and features may vary by state. Variable insurance products are distributed by Pacific Select Distributors, Inc. (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company, and are available through licensed third party broker-dealers.
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