How much is a life insurance policy worth when the insured passes away? Easy question, right?
Just look at the amount of the death benefit on the contract. Most think that, because the proceeds are received income tax-free, what you see is what you get. If the policy says $100,000, then the beneficiary will get $100,000. And most of the time they would be correct.
But the bad news is that an often-ignored section of the tax law can hold a sad surprise for the unwary.
The good news is that the same code section can provide one of the biggest prospecting opportunities for you in the business marketplace.
Section 101j of the Internal Revenue Code says that if an employer owns a policy on the life of an employee (and that means any employer on any employee on any size policy) the amount of the death benefits received over premiums paid are subject to income tax unless certain conditions were met prior to the issue of the policy.
If not, then that portion of the proceeds could be taxed on the federal level as high as 35% (top corporate rate), or as high as 42.4% (if reported to the high-income owner of a pass-through entity to whom the 3.8% ACA Net Investment Tax applies). In addition, state income tax could apply.
How easy is it avoid this problem up front? All that is required is a simple notice and consent signed by the insured prior to issue and kept in the employer’s records.
How easy is it to avoid the problem if the policy is in force and no notice and consent was signed? Nearly impossible! In most cases the only sure-fire fix is surrender and replacement of the policy, which would require getting medically re-underwritten.
A good way to start a conversation with any business prospect is to ask to review any policies owned on employees, present or past. You could alert the business owner to a potential tax problem of which they are blissfully unaware. Here is a good summary of the 101j issues in a useful question-and-answer format, suitable for use with attorneys or accountants or other advisors. Look through it and call us with any questions you have concerning clients or prospects that may have a “101j problem” with coverage in force on their employees.
Excellence, Passion, Integrity, Collaboration and Creativity – our core values since 1974
The EPICC Center is the online source for financial professionals, designed to provide them with the essential elements they need to run their practice and increase their bottom line including breaking news, carrier / product information, market trends, sales ideas, marketing tools & resources and more.