Term Life Insurance Question

**thekid** · 05-13-2011, 05:44 PM

Not in Canada (I'm canadian). In the US, I believe it is included in the estate and taxed accordingly (I don't know details of estate tax, there is none in Canada).

I would look up estate tax details (I believe the base exemptions are pretty high) to determine if any tax is applicable and if so the rate. Your insurance broker should be able to give you the details as well.

Maybe somebody else here will have more detailled info, sorry.

**mommytoc** · 05-14-2011, 02:51 PM

Life insurance proceeds are usually not taxable.

**jpg7n16** · 05-14-2011, 03:21 PM

There is no income tax on life insurance proceeds, except in certain exception situations: namely, that you bought the policy from someone else like in a life settlement contract.

see: Life Insurance & Disability Insurance Proceeds

Publication 525 (2010), Taxable and Nontaxable Income

About life settlements: Life settlement - Wikipedia, the free encyclopedia

From: Publication 525 (2010), Taxable and Nontaxable Income

Life Insurance Proceeds

Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract. However, interest income received as a result of life insurance proceeds may be taxable.

**LuckyRobin** · 05-14-2011, 07:07 PM

Okay, thanks.

**dczech09** · 05-15-2011, 08:01 AM

Hi y'all. I used to be licensed to sell this stuff. Here is the scoop...

The death benefit for term life passes to beneficiaries free of income-taxes. This is usually the case when the policyowner is the beneficiary.

If the policyowner is the insured (such is the case for you), then the death benefit will be included in your estate for the purposes of calculating estate taxes. In other words, this death benefit will be factored in for estate tax purposes. As it currently stands, if your estate does not exceed $1,000,000 then there will be no estate taxes applied. Any amount over $1,000,000 will be taxed at the death tax rate. So assuming you do not have more than $500,000 laying around and no other debts, then the $500,000 death benefit would pass tax free.

**clintdavis** · 05-17-2011, 07:05 AM

Hi LuckyRobin,

Thanks for sharing with us. A good rule of thumb is to have 8-10 times his annual income in term life insurance. That way you can invest the payout, and earning 8-12% interest, you can completely replace his income.

You absolutely need at least $250,000 on you. Even as a stay-at-home mom/housewife, you bring tremendous economic value to the household. If you passed away, how much would it cost to hire a maid, pay for child care, etc...

Term Life Insurance benefits are not taxable, so don't worry about that. Just make sure you are covered.

While you are getting the life insurance in order, PLEASE make sure you get a Will in place. You can even do a simple state-specific will on uslegalforms.com for around $30. DO NOT let strangers make decisions about who will care for your kids or who will receive your assets...and that's after the state maximizes all taxes and fees.

Good job taking care of your family in this way! Keep it up!

**LuckyRobin** · 05-17-2011, 07:21 PM

8 times his annual income would be over a million dollars worth of coverage. Would we really need that much for him? The kids are 11 and 14 and are used to a frugal lifestyle and we'll be out of non-secured debt by December and have our car paid off by June of next year. We've already figured college costs. It kind of seems like an exorbitant amount, but then again, with all the medical stuff we've had to deal with in the last eight years, maybe it's a good amount.

**frugalgirl** · 05-17-2011, 10:27 PM

Originally posted by LuckyRobin View Post

8 times his annual income would be over a million dollars worth of coverage. Would we really need that much for him? The kids are 11 and 14 and are used to a frugal lifestyle and we'll be out of non-secured debt by December and have our car paid off by June of next year. We've already figured college costs. It kind of seems like an exorbitant amount, but then again, with all the medical stuff we've had to deal with in the last eight years, maybe it's a good amount.

Have you ever done the math to figure out how much you would need to have to last your lifetime if something happened to your DH? This would include a figure for inflation to accurately estimate your expenses going forward. How much would health insurance increase if you did not get it through his job? Have you really calculated future college costs accurately? Would you be able to pay a mortgage?

When we bought term insurance years ago, we used the 10 times the salary rule and bought a little extra, too. Today, we have about 9 times DHs salary in insurance. DH had cancer 3 years ago. That was a reality check for us and, after doing the math, I wish we had bought more insurance. It would not have cost that much more. It is better to have a little more than you think you need, and pay a little more, than to not have enough. We are now stuck with what we have because he will not qualify for a new insurance policy.

I think a lot of people use this 10 times the salary rule when they first buy insurance. It's the only rule we hear. Lots of times their incomes can rise significantly over the years, they have kids, buy houses, etc. -- and the original amount they purchased is no longer 10 times their salary, but significantly less. It would not cover the expenses they never anticipated they would have when they first bought the policy.

I'd buy more insurance. I would rather pay extra for a bigger policy than have to pinch pennies for the rest of my life if something happened to my DH.

**MonkeyMama** · 05-18-2011, 05:31 AM

I think that I would also aim a little higher than I think I need. Inflation is a doozie, but rates are also VERY cheap at current, and cheaper while you are younger. So, figure what you think you need, and then aim a little bit higher. 10 times income might be way too much in your situation.

We bought insurance in our 20s, when it was DIRT CHEAP and I am glad we ended up buying more than we felt we really needed. 10 times income a decade ago equals about 6 times income today. It's still more than ample for our purposes. Though it will get less with time (inflation), we need it less with time. But, glad we bought as much as we did since we couldn't get it so cheaply today.

**disneysteve** · 05-18-2011, 08:23 AM

Originally posted by MonkeyMama View Post

glad we bought as much as we did since we couldn't get it so cheaply today.

Are you sure? You might want to check on that. Term rates have been steadily falling and it is very possible that if you bought your policy more than 5 years ago, it could be cheaper today even though you are older.

**MonkeyMama** · 05-18-2011, 08:29 AM

Nope - I have never seen cheaper insurance than we have. I am 100% sure we can not do better.

Regardless, my spouse has a brain tumor which makes him more costly to insure. All the more reason I am glad we aimed a little higher while young. Me may be too costly to insure at this point. Though it's not immediately life threatening, don't think he'd qualify for the top health rating that we both got in our 20s (probably why it is so cheap - we even have a 30-year term which is cheaper than I See for most 20-year quotes these days).

**Robert742** · 05-18-2011, 08:18 PM

Here is a life insurance needs estimator:

Life insurance needs estimator, life insurance calculator - MSN Money

You should conduct an annual review of your insurance needs to see if you need more coverage, or if you can get coverage at a lower rate. Contact your agent if your agent doe not contact you.

You don't want to change life insurance every few years to save a few bucks, but as DS said, mortality trends have lowered life insurance rates, and many people can get more coverage at a better rate,even if they are older.

However, changes in your health may mean you won't save. If you have not shopped your life insurance in 5 years, and have not heard from your agent since your agent sold you the policy, shop around on the Internet.

**Bardolf** · 05-18-2011, 09:09 PM

Hi,
In the US, I believe it is included in the estate and taxed accordingly.I would look up estate tax details (I believe the base exemptions are pretty high) to determine, if any tax is applicable and if so the rate. Your insurance broker should be able to give you the details as well.

**Bardolf** · 05-18-2011, 09:10 PM

Hi,
In the US, I believe it is included in the estate and taxed accordingly.I would look up estate tax details (I believe the base exemptions are pretty high) to determine, if any tax is applicable and if so the rate. Your insurance broker should be able to give you the details as well.

Term Life Insurance Question