LIFE INSURANCE

"As part of a sound financial plan, life insurance enables people to face challenges and have peace of mind about the future"

--President George W. Bush in 2006
when September was designated Life Insurance Awareness Month

Peace of mind is no trivial matter, yet many Americans, young and old, underestimate the value of having adequate life insurance and misunderstand the reasons for it. Young people often think that life insurance is for their parents or grandparents. At the other end of the spectrum, many people approaching retirement think it's an unnecessary expense. 

Life Insurance, Income Tax,  and Your Business The taxability issues surrounding a company-owned life insurance policy are complex and depend on a number of factors. Here are a few considerations: If your sole-proprietorship owns a key-employee policy, the proceeds might be excludable from income. But since the company will be the recipient of the proceeds, you cannot deduct the premiums. If your company is a C corporation that receives death benefits from a life insurance policy, the death benefits may increase the corporation's liability for the alternative minimum tax. For corporate owned life insurance policies issued after the enactment of the Pension Protection Act on August 17, 2006, the death benefits (in excess of premiums paid) may have to be included in taxable income. There are some complex exceptions, so it's a good idea to examine them with your tax adviser. Life insurance can be a great asset for your business but it's important to understand the potential tax implications. Your tax adviser can help sort through the issues.

Despite these beliefs, many people in a wide range of age groups can benefit from life insurance. The right policy can establish financial security for your family and your business.

Before it's too late, here are six points to consider about life insurance.

1. The Proceeds From a Policy Are Generally Tax Free

In general, if you receive a life insurance payout because of the death of an insured person such as your spouse, the benefits are not taxable income and do not need to be reported to the IRS. However, if you receive interest payments related to the policy, the interest is taxable income and must be reported.

There are exceptions that can render life insurance proceeds taxable. One example is when a policy is acquired through a transfer for valuable consideration. In that case, you can only exclude from taxable income the amount of consideration you gave, plus any premiums paid after the transfer. (See the right-hand box for more exceptions.)

2. It Only Replaces Income From Working, Right?

Many people have misconceptions about who needs life insurance. For example:

Even if you plan to spend your entire nest egg during your retirement years, life insurance allows you to leave a substantial sum of money to your children or to a favorite charity as a legacy.

3. A Policy Can Provide a Source of Emergency Cash

If you own a whole life insurance policy, you can generally draw loans from the accumulated cash value. Unlike a standard loan, there is no need to get bank approval before taking funds from your life insurance policy. Many business owners buy whole life policies partly so they will have a ready source of cash to get them over tough spots.

You can also surrender the policy for cash. If however, the proceeds are more than the cost of the policy (your investment in terms of total premiums less any refunded premiums, rebates, dividends, or unpaid loans that were not included in your income) you will need to include the excess in your taxable income.

4. It Can Serve as Collateral

A company-owned life insurance policy or a policy that is individually owned can serve as collateral for a loan. You can also use a life insurance policy to secure financing on business equipment. To secure a debt or collateralize a loan with a term policy, you make the lender the beneficiary up to the amount of the debt. The balance of the proceeds would then be paid to your other beneficiaries. When a whole life policy is used as collateral, the lender is protected from default, even if a policy holder doesn't die, by the cash surrender value.

5. A Policy Can Protect Your Business Future

You can spend a lifetime building your business, only to have it swept away by the death of a key employee, whether that key person is you or someone else. If your revenue depends heavily on the work of a star-quality salesman, you should consider having a key-employee policy on him. Real talent takes time to replace, and a key-employee life insurance policy allows businesses some time to find the right person. Again, you can keep the cost low by buying a term policy, or if you buy a whole life policy, it will do double duty as a source of ready cash.

6. It Can Be Provided as an Employee Benefit

Group life insurance is generally inexpensive and companies can make it available to employees as an employer-provided benefit or a voluntary benefit that costs little or nothing. When offered as a voluntary benefit, employees select the level of coverage they want and pay for it themselves through payroll deductions.

For all these reasons, it's a good time to talk with your tax and estate attorney, Ronald J. Cappuccio, J.D., LL.M.(Tax) at (856) 665-2121, who can help determine with your insurance agent, that you have adequate life insurance coverage. In order to leave your loved ones and your business financially secure, they will evaluate your needs, such as funeral costs, outstanding medical expenses, estate settlement fees, ongoing business expenses, credit card debts and mortgages.