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Is life insurance taxable?

Is the payout from life insurance taxed? if so, at what rate? My grandmother is not doing well and we're trying to figure out some issues with her estate now so that it's not as stressful when she passes. As we're looking into funeral costs and settling her estate I'm just wondering how much will be coming out of the life insurance and how much will be usable for costs

May 25, 2012 by Haidee from Guymon, OK in  |  Flag
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3 votes

It is always a good thing to prepare before a major event happens. Visit the attorney that has drawn up your Grandmother's will and any living trust and powers of attorney.

I would also suggest that you look at the beneficiary of the policy. To keep the proceeds from ending up in the estate, the beneficiary should be named specifically in the policy, whether it is a named person or a trust that is set up.

This is a stressful time for a family. A good plan in place makes it a little more peaceful knowing that all is in order.

Yours truly, David G Niggel Key Wealth Partners

1 Comment   |  Flag   |  May 29, 2012 from Lititz, PA
Robert Wander, CFP®

David's response is on point re the advisability of consulting attorney and having plan in place. One clarification on the life insurance: I think he was referring to the importance of naming a beneficiary in order to have the proceeds of the policy distributed directly and not have it go through the probate process. The determination of whether it is includable in the insured's estate for estate tax purposes is based on who owns the policy, not the beneficiary designation.

Flag |  May 29, 2012 near Manhattan, NY

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Generally speaking, and presumably in the case of your grandmother's policy, life insurance is not income taxable. Depending on the ownership of policy, it may or may not be includable in her estate and thus could be estate taxable but based on how you've described her situation, it doesnt sound like here estate is large enough for that to be an issue.

Comment   |  Flag   |  May 25, 2012 from Manhattan, NY

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