17 Nov Life insurance: Don’t count your chickens before they’re hatched

Q. My parents have several life insurance policies. One is whole life, two are term and there’s also an annuity. What do I have to worry about with taxes when the payments eventually come to me, and is there something I can do to save on taxes? — Thinking ahead

A. Before we get to the tax issue, there’s an important financial planning mistake you may be making.

It’s possible you won’t get a penny when your parents die.

“Do not assume or rely on inheriting assets from your parents, but to the extent possible, plan responsibly for your own future using your own resources and assets,” said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette. “Don’t count your chickens before they hatch.”

Your parents could let the policies expire during their lifetimes, or they could have other plans for the proceeds. They may make another person the beneficiary, or they could even name a charity to receive the funds.

Remember with the term life policies, if they end or expire before your parents pass away, they are worthless, Maye said.

The whole life policy may be worth something in the future but it will be impacted by a number of factors including who the beneficiary was when the insured passes away, he said.

“So for example, if the whole life policy was on your dad and he pre-deceased your mom, then your mom, if she is the beneficiary, would get the proceeds,” Maye said. “Assuming you are in fact the beneficiary of the whole life policy, its ultimate value will be impacted by whether any loans were outstanding at time of death and whether the policy was kept in force.”

Maye said with the annuity, if it was a single life or joint life, it could be worth nothing when your parents pass away.

If you do receive proceeds from a life insurance policy, regardless of the type of life insurance, proceeds are generally income tax free, said Ed Gaelick, a Chartered Life Underwriter and Chartered Financial Consultant with PSI Consultants in Glen Rock.

There are some exceptions, such as if the ownership of the policy changed, he said.

If you’re concerned about taxes, once you have the proceeds, there are certainly investment vehicles and financial planners who can help you save on future taxes, Gaelick said.

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This story was first posted in November 2015.