It’s possible. And taxable. Here’s how to ensure your loved ones are provided for – tax-free.

Americans are living longer, and as they do, many are discovering that they may actually outlive the maturity ages of their universal life insurance policies purchased years ago. While increased life expectancy is naturally good news, at issue is the amount of insurance proceeds and income available to family members and loved ones when this maturity age arrives.

“When a life insurance policy matures - reaches the age specified in the existing policy - the insurance coverage expires and the cash value is paid out,” explains Joshua Klein, Director of the Life Insurance Division of The NIA Group and Kornreich-NIA. “If the policyholder is alive, then the amount of cash paid out, minus total premiums paid to date, is considered taxable income when distributed (taxable gain). That negates one of the important features of a life insurance policy and it could significantly reduce the income available.”

Staying Tax-Free
“Retirees and individuals nearing retirement should review their universal life insurance policies and consult with their insurance broker to ensure that the original policy design is on target and that the maturity age they set is not premature,” notes Klein. “Some carriers extend maturity provisions for life or for a specified number of years in order to help policyholders of older contracts avoid this payment reduction upon maturity. A life insurance broker should be able to tell policyholders whether such extensions are in place.”

Fortunately, most life insurance products sold today do not have a maturity age or they include an option for the policyholder to choose “extended maturity for life;” and thus, preserve this valuable tax benefit. Klein also notes that individuals seeking to transfer assets and maximize their estates planning should take advantage of tax exemptions and gift options available. However, laws affecting the amount that individuals can gift do change, and your insurance advisor can help you navigate and understand the current legislative landscape. In 2006, one’s lifetime exemption is increasing by $500,000 to $2,000,000 and annual tax-free gifting is increasing from $11,000 to $12,000 per recipient.

For more information on life insurance or creating your estate plan, contact your NIA or Kornreich-NIA broker or Josh Klein at (212) 867-0070; jklein.kornreich@niagroup.com.