One of the first inquires seniors make when investing in life insurance, is about inheritance tax on beneficiary benefits. When inheritance tax rates are high, inheritors of an estate stand to lose part or most of the original value where subject to taxation. Life insurance offers a secure retirement investment that allows beneficiaries of those policies to escape inheritance tax.
Senior Life Insurance and Inheritance Tax
Life insurance enables estate planners to avoid the devaluation of their funds to family and other beneficiaries. A life insurance policy forgoes inheritance taxes and also serves to cover otherr final expenses. The advantages and multipurpose benefits of life insurance for seniors can play an important role in the living legacy of their investments. After an insured person passes on, life insurance death benefits are proceeds distributed to beneficiaries listed on a policy.
If shopping for life insurance, seniors will note that most of the lead insurers offer new coverage up to the age of 85, with of over $1 million dollars to beneficiaries. Depending on the policyholder, the decision to liquidate or transfer other assets to life insurance late in life is a common one.
Life Settlement Policies
Conversely, life settlement policies are another product similar to insurance than can be a valuable source of liquidity. Often called a ‘senior settlement’, life settlements sell existing life insurance policies to third parties. Third parties in turn pay more than the cash value at time of issuance, less the net death benefit. This is obviously only attractive if the net death benefit is low. In sum, life settlements offer cash surrender value to policyholders, yet seniors should be aware of high transaction costs and conditions listed in the fine print.
The popularity of life settlement liquidation is a growing trend in the viatical settlement sector that has advanced those products as a standard sources of liquidity since the 1980s. Largely attributed to life settlement policies held by AIDS patients and other terminally ill policyholders, the limited life expectancy of under a 10 year period has promoted this trend. Life settlements on this segment of the insurance market tend to be higher in net value than death benefits found in viatical policies.
When investing in either a life insurance policy or life settlement policy it is important to recognize that the purchaser of a liquidated policy is acquiring a financial interest in your mortality. Purchasers must pay additional premiums in addition to the lump sum for acquisition of the policy. The purchaser agrees to pay those premiums up to the point of death, at which time they receive the death benefit when the insured dies.
Other Tax-Free Options
Another tax free method of extracting cash from an insurance policy is to switch from one policy to another. Otherwise known as a 1035 Exchange, the Internal Revenue Service allows for policyholders to exchange policies under their name at no tax increase. Whether you decide to purchase a life insurance policy, liquidate a policy in a life settlement or exchange a policy to reap the most reward from your insurance investment, indemnity is security in your golden years.