Upon the death of an individual who is the owner and insured of a life insurance policy, a death benefit is paid to the individual's designated beneficiaries. These proceeds are completely free of all income taxes. The income tax savings for an insured's beneficiaries is significant due to this favorable income tax treatment.
Consider a situation where the insured has a 20-year term policy with a death benefit of $5,000,000, and the insured pays annual $5,000 premiums. If the insured dies 10 years into the policy, he would have only contributed $50,000 and his beneficiaries would receive $5,000,000. This example results in $4,950,000 gains which are totally free from income taxes—saving the beneficiaries millions. Despite the favorable income tax treatment, life insurance proceeds are generally subject to federal and state estate tax upon the insured's death if the insured is the owner of the policy.1
Own by Trust to Avoid Estate Tax
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