How Can Seniors Use Life Insurance to Earn Money Tax-Free?
The cost of a nursing home can be daunting. However, you may not know that life insurance can help offset that expense. Read on to learn more.
Life insurance can be a powerful asset for retirees. If you have a life-insurance policy, you can borrow up to your cost basis – tax-free. However, if you withdraw over your cost basis, you may be liable for taxes should your policy lapses. You should also remember that while you won’t necessarily have to pay back the amount borrowed, it will be subtracted from your death benefits.
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In addition, if a relative other than your spouse owns your life-insurance policy, any remaining benefits will transfer to your heirs without income or estate tax.
What Happens to the Death Benefit When I Pass Away?
Your life-insurance policy specifies beneficiaries for death benefits upon your death. In the majority of cases, a death benefit is paid monthly, and a death-benefit annuity may include cost-of-living adjustments to insulate against inflation.
Though most of the death benefit is nontaxable, the IRS may determine that a portion is interest income and is indeed taxable. IRS Publication 525, “Taxable and Nontaxable Income,” explains this in further detail.
Where Can Seniors Buy Life Insurance?
You can select amongst simplified or guaranteed-issue insurance policies. If you’re in reasonable health, you will probably qualify for a simplified plan, which offers an immediate death benefit and lower premiums than guaranteed plans.
For their part, guaranteed-issue policies ensure that nobody is turned down for life insurance, regardless of medical conditions. However, these plans are also referred to as “burial insurance”, since they may only be sufficient to cover a modest funeral service.
A life-insurance broker can be very helpful in finding the right plan to meet your needs. The Internet is also a powerful resource, both when it comes to researching and buying your policy. When comparing offers, make sure to contact your state insurance office or an insurance-rating service such as A.M. Best or Fitch Ratings to do a reality check before signing on the dotted line.
When you buy your policy, make sure you understand and can comply with the payment agreement. Your policy can lapse if you fail to make a premium payment. Some policies are written with flexible premiums, allowing you to pay more or less than the recommended premium or to skip a payment from time to time.
Recently there has been talk that life insurers may receive federal bailout funds, providing government backing for troubled industry members such as the beleaguered American International Group, Inc. AIG has received more than $170 billion in federal bailout funds to date.
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Safety Net For Life Insurance Policies
The National Organization of Life and Health-Insurance Guaranty Associations is a voluntary group of the life and health insurance guaranty associations of the 50 U.S. states, the District of Columbia, and Puerto Rico. Founded in 1983, NOLHGA offers association members a way to protect policyholders in case a company becomes insolvent.
Since its inception, NOLGHA has:
- Protected more than 2.3 million policyholders
- Guaranteed more than $21.2 billion in benefits
- Contributed $5.2 billion to ensure receipt of benefits.
Here’s how it works:
- If an insurance company becomes financially unstable, the insurance department in its home state can intervene to control the company in a process known as receivership.
- If these efforts are fruitful, receivership ends. If not, the state insurance commissioner declares the company insolvent, and the process moves on to liquidation to pay off creditors and policyholders.
- During liquidation, state health and life insurance guaranty associations provide continuing coverage for policyholders, thus offering a safety net.