If a loved one recently passed away with a life insurance policy, you might wonder how the policy will affect the probate process. You know that probate is the legal process of validating your loved one’s will, identifying the property belonging to their estate, and distributing that property among heirs – but how are life insurance benefits treated during this process? Are they considered part of the estate? Will they get taxed as part of the estate?
These are understandable questions and concerns. Many families who expect life insurance benefits probably need that money to make ends meet after their loved ones pass away. Fortunately, life insurance benefits are paid directly to the named beneficiaries on the policy and don’t undergo probate, but there are other issues to be aware of at this time.
How Do I Collect Life Insurance Policy Benefits?
In most situations, you will need to contact the insurance company, inform a representative of the death, and request a claim form. As the beneficiary of the policy, the money will be transferred directly to you upon payout.
When more than one beneficiary is named to a policy, benefits are normally divided equally among them. If a named beneficiary is themselves deceased, their share is equally distributed among the surviving beneficiaries.
Tax Consequences & Concerns
Although life insurance benefits skip probate and are paid directly to beneficiaries, they can factor into the deceased’s gross estate for estate tax consideration. This is possible when the deceased was the owner of the policy at death or had transferred ownership – such as to a trust – within three years prior to death.
Generally speaking, beneficiaries don’t pay income taxes on life insurance benefits when they’re paid out as lump sums because the IRS doesn’t consider such payment as income. If benefits are paid out in installments and the balance accrues interest, that interest may then be considered taxable income.
Importantly, the federal government also doesn’t have an inheritance tax, although some states do. Check your state’s laws or consult with the life insurance company to find out if there is any tax liability attached to your benefits.
Do You Want to Protect Your Loved Ones?
If you want to protect your loved ones for the future, one of the best ways to do it is to establish a life insurance policy. With help from Insurance Specialists, Inc., we can walk you through your options and help you identify the policy that’s right for you and your loved ones.
For more information about how we can help, please contact us online.
If a loved one recently passed away with a life insurance policy, you might wonder how the policy will affect the probate process. You know that probate is the legal process of validating your loved one’s will, identifying the property belonging to their estate, and distributing that property among heirs – but how are life insurance benefits treated during this process? Are they considered part of the estate? Will they get taxed as part of the estate?
These are understandable questions and concerns. Many families who expect life insurance benefits probably need that money to make ends meet after their loved ones pass away. Fortunately, life insurance benefits are paid directly to the named beneficiaries on the policy and don’t undergo probate, but there are other issues to be aware of at this time.
How Do I Collect Life Insurance Policy Benefits?
In most situations, you will need to contact the insurance company, inform a representative of the death, and request a claim form. As the beneficiary of the policy, the money will be transferred directly to you upon payout.
When more than one beneficiary is named to a policy, benefits are normally divided equally among them. If a named beneficiary is themselves deceased, their share is equally distributed among the surviving beneficiaries.
Tax Consequences & Concerns
Although life insurance benefits skip probate and are paid directly to beneficiaries, they can factor into the deceased’s gross estate for estate tax consideration. This is possible when the deceased was the owner of the policy at death or had transferred ownership – such as to a trust – within three years prior to death.
Generally speaking, beneficiaries don’t pay income taxes on life insurance benefits when they’re paid out as lump sums because the IRS doesn’t consider such payment as income. If benefits are paid out in installments and the balance accrues interest, that interest may then be considered taxable income.
Importantly, the federal government also doesn’t have an inheritance tax, although some states do. Check your state’s laws or consult with the life insurance company to find out if there is any tax liability attached to your benefits.
Do You Want to Protect Your Loved Ones?
If you want to protect your loved ones for the future, one of the best ways to do it is to establish a life insurance policy. With help from Insurance Specialists, Inc., we can walk you through your options and help you identify the policy that’s right for you and your loved ones.
For more information about how we can help, please contact us online.