3 surprising facts about life insurance

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Don’t get caught up in life insurance rules.


Key points

  • Life insurance rules can be complicated.
  • Many people do not know the tax rules around death benefits.
  • Some policyholders also do not understand all their rights.

Many people buy life insurance to prepare for the possibility of premature death. Since people often have relatives depending on their income or services, having a policy could help prevent a financial catastrophe in the event of their death.

Although life insurance policies are common, not everyone understands the details of how they work. In fact, there are three facts about life insurance that may come as a surprise to many. Here they are.

1. Death benefits shall be exempt from tax

As a general rule, the beneficiary of death benefit in life insurance will not be charged taxes on the money he receives. There are limited exceptions. For example, if a policy is not paid immediately and interest accrues, beneficiaries may be subject to interest tax. But for the most part, any benefits are not considered income, and those who receive it will not hesitate to give the IRS or the state revenue department some of the money that is intended to help them. endure after a loved one premature death.

The fact that death benefits are tax-free makes them more valuable to those who receive the money. This is one of the reasons people usually include life insurance as part of their plan to provide the people they care for if something goes wrong.

2. The designated beneficiary will be superior to the will

There is another key rule you need to know about life insurance. When the policyholder identifies a beneficiary, it is usually the person who will receive the death benefit – regardless of what the will of the deceased says.

For example, if someone says that his husband should receive all the money he leaves behind, but he points to his cousin as a beneficiary of a life insurance policy he bought before he got married, the cousin will usually receive death benefits despite what the will says.

There are some limited exceptions to this. For example, some states have divorce annulment laws that apply if the policyholder forgets to change his or her beneficiary after the marriage. But for the most part, this beneficiary will receive the money, which is why it is so important to update life insurance policies, as circumstances change over time.

3. Death benefits can sometimes be paid while the policyholder is alive

Most people associate life insurance policies with post-death benefits. And this happens in most cases. Sometimes, however, a policy can provide much-needed funds while it is alive.

This can happen, for example, if the policyholder has purchased a rider with accelerated compensation. This is a supplement to the coverage, which allows the payment of money in case the person covered becomes terminally ill. This type of rider can help ensure that there is money to pay for expensive medical care or to provide support when a serious illness makes work impossible.

Finally, it is important to understand these three key facts so that insured persons and their beneficiaries know what to expect when it comes to death benefits. Knowledge of these rules helps to ensure that informed choices are made when receiving coverage and when claiming life insurance.

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