Life insurance plans are an excellent way to ensure your spouse and children are provided for upon your passing. Many people worry that the proceeds their plan pays out are taxable, but this is not always an issue. There are a few unique circumstances when your beneficiaries would have to pay taxes on these payments.
When Are Life Insurance Plan Benefits Taxable?
1. Your Spouse Isn’t a U.S. Citizen
Thanks to the Unified Gift & Estate Tax marital deduction, you can transfer your wealth to your spouse tax-free. This benefit only applies, however, if your spouse is a U.S. citizen. If they aren’t a citizen, then they face estate taxes in accordance with the Personal Estate Tax Exemption rules.
2. The Total Value of Your Estate Exceeds the Federal Tax Threshold
With the recent passing of the Tax Cuts and Jobs Act, the federal estate tax threshold was raised to $11.2 million per person. This means you can leave your spouse, children, or any other beneficiary up to that amount without them having to face estate taxes. If the value of your life insurance plan combined with other assets exceeds that amount, then your beneficiaries will have to pay taxes.
3. Your State Has an Estate Tax
Several states also impose estate taxes. Many use the same $11.2 million threshold imposed at the federal level, but some have much lower limits. Vermont, for example, taxes estates valued at $2.75 million or more. In North Carolina, however, there are no estate taxes on owned or inherited property.
Whether you’re looking into life insurance plans for the first time or you need to make changes to an existing policy, working with a qualified insurance agency is key. For more than 20 years, Dewey Beckner of Allstate Insurance Companies has helped High Point, NC, residents navigate the world of insurance. He offers a variety of insurance products to meet all your needs, including homeowners, renters, and car insurance, in addition to life and term-life insurance. Request a no-obligation insurance quote online or call (336) 884-5636.