Life insurance may not seem complicated, especially when you understand the process. Here are five points to consider before purchasing a policy:
The conversation: First, discussing life insurance with your loved ones can be difficult, because you are raising the elephant in the room: your death. But if they rely on your income, this is an important conversation to have.
The role of your will: Many people believe a will can be used to dictate who receives the proceeds from your life insurance policy. But because it’s a contract with an insurance company, you will need to specify beneficiary/beneficiaries to that company.
The beneficiary: Regardless of the policy you choose, you typically need to select a beneficiary who will receive the proceeds of your life insurance policy when you die. That, too, can be an uncomfortable discussion. Under most circumstances, your beneficiary will be your spouse, then your children. But it can be more complicated. For example, you may not want to leave your money to minor children, in which case you may need to set up a trust.
The exceptions: In most states, you can choose the beneficiary of your life insurance policy. However, in “community property” states – currently Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin – property obtained in the marriage is owned by both spouses. In those states, if you want the beneficiary of your life insurance policy to be other than your spouse, you both may need to acknowledge that in writing.
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The taxes: Finally, while life insurance proceeds are free from federal income taxes, they can be counted as part of your estate. This means they may be subject to estate tax. If you have a large policy, you may want to consider a trust that can keep the proceeds out of your estate.
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