2c:["$","$L2d",null,{"category":"$2e","relatedArticles":[{"id":"cG9zdDoxNzM0OTI=","databaseId":173492,"postId":173492,"author":{"node":{"id":"dXNlcjo5OQ==","databaseId":99,"userId":99,"avatar":{"url":"https://secure.gravatar.com/avatar/67b8e9b4ee40c2b36d23ca662b66d02f?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Ashley Kilroy is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Ashley","fullName":"Ashley Kilroy","lastName":"Kilroy","name":"Ashley Kilroy","postCount":{"pageInfo":{"offsetPagination":{"total":530,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"achorpenning","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybTo0NzIy","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":4722,"categoryId":4722,"link":"https://smartasset.com/life-insurance/articles","name":"Life Insurance","postCount":{"pageInfo":{"offsetPagination":{"total":76,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"life-insurance","ancestors":null,"parent":null,"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$2f","date":"2022-10-06T09:46:43","excerpt":"

\n","featuredImage":{"id":"cG9zdDoxNzM0OTM=","databaseId":173493,"altText":"family income policy","date":"2022-11-08T18:14:46","fileSize":27700,"mimeType":"image/jpeg","modified":"2022-11-08T18:14:46","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2022/10/happy-young-couple-or-hr-team-handshake-lawyer-job-applicant-picture-id1254063689.jpg","__typename":"MediaItem"},"modified":{"datetime":"2023-8-24","readable":"August 24, 2023"},"multipleBylinesByRole":{"editedBy":null,"reviewedBy":null,"writtenBy":null,"factCheckedBy":null,"secondEditor":null,"hideAuthor":null,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/life-insurance/what-is-a-family-income-policy-for-life-insurance","metaDesc":"A family income policy is a rider on life insurance that guarantees monthly payments to beneficiaries as soon as the policyholder dies. Here's how it works.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":6,"title":"What Is a Family Income Policy for Life Insurance? - SmartAsset","__typename":"PostTypeSEO"},"slug":"what-is-a-family-income-policy-for-life-insurance","status":"publish","title":"What Is a Family Income Policy for Life Insurance?","uri":"/life-insurance/what-is-a-family-income-policy-for-life-insurance","tags":{"nodes":[],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":{"id":"dXNlcjo5OQ==","databaseId":99,"userId":99,"avatar":"$30","description":"Ashley Kilroy is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.","additionalMeta":"$31","email":null,"firstName":"Ashley","fullName":"Ashley Kilroy","lastName":"Kilroy","name":"Ashley Kilroy","postCount":"$32","slug":"ashley-kilroy","__typename":"User"},"editedBy":null,"reviewedBy":null,"factCheckedBy":null,"secondEditor":null},"category":{"id":"dGVybTo0NzIy","children":"$35","databaseId":4722,"categoryId":4722,"link":"https://smartasset.com/life-insurance/articles","name":"Life Insurance","postCount":76,"slug":"life-insurance","ancestors":null,"parent":null,"__typename":"Category"},"isModifiedBeforePublished":false,"contentBlocks":["

Life insurance payouts can create financial stability for grieving families, but they can also give rise to poor financial decisions and strife. Fortunately, lump sum death benefits are just one option for life insurance policies. A family income policy is a rider on life insurance that guarantees monthly payments to beneficiaries when the policyholder dies. The monthly payments are usually comparable to the policyholder’s salary or wages. Working with a financial advisor can give you the insight necessary to make the right estate plans to protect your family.

","

What Is a Family Income Policy for Life Insurance?

","

A family income policy for life insurance changes how your beneficiaries receive the policyholder’s death benefit. With most life insurance policies, the death benefit is a single lump sum payment. But a family income policy means your life insurance company distributes monthly payments instead.

","

Although most beneficiaries prefer a one-time payout for the death benefit, a family income policy can be better in specific circumstances. For example, suppose your beneficiaries don’t need the financial assistance from the death benefit or would find the amount of money from the lump sum stressful. In that case, a family income policy can be more manageable.

","

How the Family Income Policy Works

","

A family income policy is term life insurance, meaning the policy lasts for a specific time. If the policyholder passes away while the policy is active, the death benefit kicks in and sends beneficiaries monthly payments for a set period.

","

Family income policies are term life insurance in which the monetary value of the death benefit diminishes over time. As with all kinds of decreasing term life insurance, how long the monthly payments last depends on when the policyholder dies. Therefore, deciding how long the term lasts and the monthly payment amount is critical when purchasing a family income policy.

","

Because a family income policy creates monthly revenue, it can replace the income earned by the policyholder if they pass away. As a result, households with only one person earning wages may find a family income policy suitable. It’s important to calculate how much life insurance you need before setting it up.

","

Family Income Policy Rider Example

","

For example, you might purchase a family income policy that pays your beneficiaries $4,000 monthly upon your death. If you die five years after purchasing a thirty-year policy, your policy will send your beneficiaries $4,000 monthly payments for twenty-five years. However, if you die twenty-five years into the policy, your beneficiaries will receive payments for only five years.

","

Pros and Cons of Family Life Insurance

","

When looking at getting a family life insurance policy there are many things to consider to help you determine whether it is the right decision for you. You should weigh both sides of the decision carefully to know for sure that you’re making the right decision that will protect your family.

","

Advantages of Family Life Insurance

","

Family income policies have the following advantages:

","

Grieving families can find dealing with huge life insurance payouts challenging, while monthly payments are easier to manage.
Monthly payments can emulate the income a breadwinner earns, maintaining financial stability for families losing their only source of income.
The absence of a lump sum can prevent impulsive major financial decisions.
Beneficiaries still receive payments if the policyholder passes away later in the term.
Your policy lasts while children grow up, then goes away once they become self-sufficient adults.
Term life insurance tends to be cheaper than whole life insurance, saving the policyholder money annually.

","

Disadvantages of Family Life Insurance

","

Family life insurance may not be suitable for your family for the following reasons:

","

The death benefit payout decreases with each successive year into the term. In other words, the longer the policyholder lives, the fewer monthly payments beneficiaries will receive.
Since life insurance premiums depend on numerous factors, your personal circumstances, such as your health or lifestyle, could increase insurance costs. As a result, your family life insurance could be as expensive as a whole life policy while not providing life-long coverage.
Even if your spouse or children are financially self-sufficient, a life insurance policy can defray funeral costs or pay off debt. Unfortunately, once the term expires, your life insurance coverage goes away.

","

Alternatives to Family Income Policies

","

If a death benefit of monthly payments appeals to you but decreasing term life insurance is problematic, here are two alternatives to consider:

","

1. Family Income Rider

","

Decreasing term life insurance isn’t the only insurance that can include a family income policy. You can add a family income rider to many insurance policies to ensure your family receives monthly payments if you pass away. Depending on your policy, your beneficiaries might receive monthly payments plus a lump-sum death benefit. However, family income riders usually increase life insurance premiums, so ask your life insurance company about costs.

","

2. Annuity Benefit

","

You can set up your death benefit as an annuity, which distributes monthly payments to beneficiaries. Your beneficiaries can decide whether they receive payments for a set amount of years or life. An annuity differs from a family income policy because your policy will pay out the full value whether you die a year after you purchase it or the year before it expires. In addition, because an annuity is an investment account, it has tax implications that standard life insurance doesn’t.

","

The Bottom Line

","

Life insurance is usually structured with a lump sum death benefit. This single, sizable payment helps beneficiaries financially and simplifies the process for grieving families. However, family income policies can help young families accustomed to monthly income and beneficiaries who might make unwise financial choices with a lump sum payout. In addition, since the payout decreases over time, family income policies won’t provide as much value if a policyholder passes away at an older age.

","

Tips for Buying Life Insurance

","$37","

Photo credit: ©iStock.com/fizkes, ©iStock.com/Nikola Stojadinovic, ©iStock.com/StefaNikolic

"],"experts":null,"link":"/life-insurance/what-is-a-family-income-policy-for-life-insurance","published":{"datetime":"2022-10-6","readable":"October 6, 2022"},"shareInfo":{"title":"What Is a Family Income Policy for Life Insurance?","origin":"/life-insurance/what-is-a-family-income-policy-for-life-insurance"},"isNewsArticle":false},{"id":"cG9zdDoyODEyOA==","databaseId":28128,"postId":28128,"author":{"node":{"id":"dXNlcjo1MA==","databaseId":50,"userId":50,"avatar":{"url":"https://secure.gravatar.com/avatar/10ca58872f36412ceff58616bb971c22?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Amelia Josephson is a writer passionate about covering financial literacy topics. Her areas of expertise include retirement and home buying. Amelia's work has appeared across the web, including on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Amelia","fullName":"Amelia Josephson","lastName":"Josephson","name":"Amelia Josephson","postCount":{"pageInfo":{"offsetPagination":{"total":334,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"ajosephson","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybTo0NzIy","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":4722,"categoryId":4722,"link":"https://smartasset.com/life-insurance/articles","name":"Life Insurance","postCount":{"pageInfo":{"offsetPagination":{"total":76,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"life-insurance","ancestors":null,"parent":null,"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$38","date":"2015-03-04T14:30:58","excerpt":"

\n","featuredImage":{"id":"cG9zdDoxOTI0ODM=","databaseId":192483,"altText":"Credit Life Insurance","date":"2023-03-21T02:16:02","fileSize":106841,"mimeType":"image/jpeg","modified":"2023-03-21T02:16:02","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2015/03/credit-life-insurance1.jpg","__typename":"MediaItem"},"modified":{"datetime":"2023-8-17","readable":"August 17, 2023"},"multipleBylinesByRole":{"editedBy":null,"reviewedBy":null,"writtenBy":null,"factCheckedBy":null,"secondEditor":null,"hideAuthor":null,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/life-insurance/what-is-credit-life-insurance","metaDesc":"Credit life insurance pays your creditors upon your death. Unlike term or universal life insurance, credit life insurance does not pay your beneficiaries...","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":6,"title":"What is Credit Life Insurance? - SmartAsset","__typename":"PostTypeSEO"},"slug":"what-is-credit-life-insurance","status":"publish","title":"What Is Credit Life Insurance?","uri":"/life-insurance/what-is-credit-life-insurance","tags":{"nodes":[],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":{"id":"dXNlcjo1MA==","databaseId":50,"userId":50,"avatar":"$39","description":"Amelia Josephson is a writer passionate about covering financial literacy topics. Her areas of expertise include retirement and home buying. Amelia's work has appeared across the web, including on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.","additionalMeta":"$3a","email":null,"firstName":"Amelia","fullName":"Amelia Josephson","lastName":"Josephson","name":"Amelia Josephson","postCount":"$3b","slug":"amelia-josephson","__typename":"User"},"editedBy":null,"reviewedBy":null,"factCheckedBy":null,"secondEditor":null},"category":{"id":"dGVybTo0NzIy","children":"$3e","databaseId":4722,"categoryId":4722,"link":"https://smartasset.com/life-insurance/articles","name":"Life Insurance","postCount":76,"slug":"life-insurance","ancestors":null,"parent":null,"__typename":"Category"},"isModifiedBeforePublished":false,"contentBlocks":["

Credit life insurance pays a policyholder’s debts when the policyholder dies. Unlike term or universal life insurance, it doesn’t pay out to the policyholder’s chosen beneficiaries. Instead, the policyholder’s creditors receive the value of a credit life insurance policy. If you’re wondering how this works, you’ve come to the right place. And if you feel like you want more advice tailored to your specific needs, head over to SmartAsset’s financial advisor matching tool to get paired with an expert professional to guide you through your life insurance matters.

","

Get life insurance quotes now.

","

How Does Credit Life Insurance Work?

","

Let’s say you sign on a personal loan, auto loan or a mortgage. Getting credit life insurance is as simple as adding a policy to the loan deal. The idea behind this insurance is to give you peace of mind knowing that when you die, your debts will die with you.

","

Why Buy Credit Life Insurance?

","

Sure, credit life insurance will ensure your debts definitely die with you. However, most debts die with you anyway. Your kids won’t be on the hook for your car loan after you’ve shuffled off this mortal coil. So why buy credit life insurance?

","

There are a couple of reasons to consider this kind of coverage. For one, it provides protection for shared debts. If you hold debt in common with another person (a mortgage with your spouse, for example), then you do need to worry about settling the debt after you die. If you live in a common property state, your spouse could lose a chunk of your estate to your creditors. (As of this writing there are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Alaska allows couples to opt-in and make their property community property.) But a regular life insurance policy could help your spouse pay debts, too. You don’t necessarily need special credit life insurance.

","

Credit life insurance also appeals to some for its characteristic as “guaranteed issue” life insurance. That means you’re eligible for coverage simply by virtue of being a borrower. You won’t need to undergo a medical exam to get this kind of policy. So it provides a good alternative if health problems have rendered you ineligible for regular life insurance.

","

Who Benefits from Credit Life Insurance?

","

","

It bears repeating that credit life insurance doesn’t directly benefit your spouse or heirs. Instead, the policies pay out to the your creditors. If you’re worried that you’re carrying an unmanageable debt burden, credit life insurance could set your mind at ease. That way you know your spouse won’t inherit that debt or face eviction from your family home.

","

You could just make your spouse the beneficiary with a regular life insurance policy. This would place responsibility on him or her to pay off the mortgage (and/or other debts) over time. But if your life insurance policy won’t cover enough of your debt, credit life insurance could help.

","

Is Credit Life Insurance Worth It?

","

General wisdom states that credit life insurance isn’t an ideal form of life insurance. It isn’t really all that necessary since most debts can’t be inherited anyway. And if you do have debts you share with other people, you could always use a term or universal life insurance policy to provide your beneficiaries with enough funds to pay off shared debt. You’ll get more coverage for less money with term life insurance than you would with credit life insurance.

","

One big downside to credit life insurance as opposed to regular life insurance is that the value of a credit life insurance policy decreases over time. Say you owe $200,000 on a mortgage you co-signed with your spouse. You decide to buy a $200,000 life insurance policy. If you buy a credit life insurance policy, the value of your policy will decrease from $200,000 as you pay down the mortgage. However, you keep paying the same premiums. That’s because you’re only insured for the amount you owe. But with term life insurance, you keep paying premiums and your policy value stays at $200,000, even if you completely pay off the mortgage. That’s better for your spouse and more value for your money.

","

The Hard Sell

","

Sometimes consumers can get talked into paying for credit insurance without realizing it. Occasionally, lenders roll the cost of the policy into a loan agreement without disclosing the charges or making it clear to the borrower that they are optional. This practice is illegal and the Federal Trade Commission has issued a consumer warning about it.

","

It’s always a good idea to review a loan agreement before you sign it. If you see charges for credit life insurance, credit insurance, credit unemployment insurance or credit disability insurance, talk to the lender. These should be voluntary, so if you want them removed, speak up!

","

Plus, a lender can’t deny you a home loan or a personal loan just because you don’t opt for credit insurance. (Private Mortgage Insurance, which lenders charge on home purchases with a down payment of less than 20%, is a different matter.) If a lender says that your loan won’t go through unless you agree to buy credit life insurance, you might want to find a different lender.

","

If you decide to buy credit life insurance, be sure to ask whether the premiums are paid separately or financed into the loan. If they’re financed, you’ll pay interest on them. More interest means more of your hard-earned money goes to the lender, so you might want to fight for your right to pay the monthly premium separately.

","

Bottom Line

","

It’s a great idea to think about how your heirs will fare financially in the event of your death, and to protect anyone who co-signed a loan, credit card or mortgage with you. In most cases, though, credit life insurance isn’t the best way to do so. It can be a handy tool, but other life insurance policies can achieve the same goals and more.

","

If you’re not sure which option is right for you, consider talking to an insurance or a financial advisor. SmartAsset’s financial advisor matching tool can help you find a person to work with to guide you through your life insurance matters. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three registered investment advisors who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

","

Photo credit: ©flickr, ©iStock.com/digitalskillet, ©iStock.com/Ridofranz

"],"experts":null,"link":"/life-insurance/what-is-credit-life-insurance","published":{"datetime":"2015-3-4","readable":"March 4, 2015"},"shareInfo":{"title":"What Is Credit Life Insurance?","origin":"/life-insurance/what-is-credit-life-insurance"},"isNewsArticle":false},{"id":"cG9zdDo2MDkxMA==","databaseId":60910,"postId":60910,"author":{"node":{"id":"dXNlcjo1MA==","databaseId":50,"userId":50,"avatar":{"url":"https://secure.gravatar.com/avatar/10ca58872f36412ceff58616bb971c22?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Amelia Josephson is a writer passionate about covering financial literacy topics. Her areas of expertise include retirement and home buying. Amelia's work has appeared across the web, including on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Amelia","fullName":"Amelia Josephson","lastName":"Josephson","name":"Amelia Josephson","postCount":{"pageInfo":{"offsetPagination":{"total":334,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"ajosephson","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybTo0NzIy","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":4722,"categoryId":4722,"link":"https://smartasset.com/life-insurance/articles","name":"Life Insurance","postCount":{"pageInfo":{"offsetPagination":{"total":76,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"life-insurance","ancestors":null,"parent":null,"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$40","date":"2017-02-06T13:00:57","excerpt":"

\n","featuredImage":{"id":"cG9zdDo2MDk0OA==","databaseId":60948,"altText":"What to Know About Taxes on Life Insurance","date":"2017-01-25T17:24:20","fileSize":34676,"mimeType":"image/jpeg","modified":"2017-01-25T17:24:29","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2017/01/life_insurance_taxes_1.jpg","__typename":"MediaItem"},"modified":{"datetime":"2019-8-21","readable":"August 21, 2019"},"multipleBylinesByRole":{"editedBy":null,"reviewedBy":null,"writtenBy":null,"factCheckedBy":null,"secondEditor":null,"hideAuthor":null,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/life-insurance/what-to-know-about-taxes-on-life-insurance","metaDesc":"Curious about taxes on life insurance? You may have heard that life insurance policies can help your family shelter money from taxes but maybe you're...","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":4,"title":"What to Know About Taxes on Life Insurance - SmartAsset","__typename":"PostTypeSEO"},"slug":"what-to-know-about-taxes-on-life-insurance","status":"publish","title":"What to Know About Taxes on Life Insurance","uri":"/life-insurance/what-to-know-about-taxes-on-life-insurance","tags":{"nodes":[],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":{"id":"dXNlcjo1MA==","databaseId":50,"userId":50,"avatar":"$41","description":"Amelia Josephson is a writer passionate about covering financial literacy topics. Her areas of expertise include retirement and home buying. Amelia's work has appeared across the web, including on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.","additionalMeta":"$42","email":null,"firstName":"Amelia","fullName":"Amelia Josephson","lastName":"Josephson","name":"Amelia Josephson","postCount":"$43","slug":"amelia-josephson","__typename":"User"},"editedBy":null,"reviewedBy":null,"factCheckedBy":null,"secondEditor":null},"category":{"id":"dGVybTo0NzIy","children":"$46","databaseId":4722,"categoryId":4722,"link":"https://smartasset.com/life-insurance/articles","name":"Life Insurance","postCount":76,"slug":"life-insurance","ancestors":null,"parent":null,"__typename":"Category"},"isModifiedBeforePublished":false,"contentBlocks":["

Life insurance is an important part of financial planning. It becomes increasingly important as people get older and begin to think about ensuring the care of their family after they die. However, there are important tax implications to consider when deciding to use life insurance and when naming your beneficiaries. From taxes on payouts to estate tax issues, there is a lot of information to manage. It might make sense to find a financial advisor who can help you navigate the various life insurance products available. SmartAsset can help you find the right one who is right for you with our free financial advisor matching service.
\n

","

Taxes on Life Insurance Payouts

","

How does the IRS tax life insurance proceeds? The short answer is that lump-sum death benefits generally are not subject to income taxes. Most people who buy life insurance pay for it in a series of premiums. When the policyholder dies, the beneficiaries receive the death benefit in a lump sum. When life insurance is paid for and disbursed in this way, the benefit is not taxable unless it triggers the estate tax (more on that below).

","

If you opt for permanent life insurance (as opposed to term life insurance), your policy can accumulate cash value without triggering taxes. For policies that pay dividends, those dividends are generally not taxable, unless you receive more than you’ve paid in premiums.

","

As you can see, there are plenty of ways to get tax-free gains from a life insurance policy. However, there are certain life insurance decisions that can lead to taxation of some or all of the life insurance policy. Let’s take a look at some cases in which life insurance is taxable.

","

Taxes on Life Insurance Installment Payments

","

Some life insurance policyholders and beneficiaries choose to structure their policy so that the beneficiary receives the payment in annual or monthly installments rather than in a lump sum.

","

In that case, the bulk of the policy earns interest over time. The interest is considered taxable income. The same goes for any interest that the death benefit earns in the period between the death of the policyholder and the disbursement of funds to the beneficiary.

","

Life Insurance and Estate Taxes

","

Death benefits from a life insurance policy might be subject to the estate tax. This depends on the size of a policyholder’s life insurance policy and other assets. If you want to exclude your life insurance policy from your taxable estate when you die, one option is to name your spouse as your beneficiary. Life insurance policies left to a spouse are not counted as part of the estate of the deceased.

","

Another option is to transfer ownership of the policy to your beneficiary. The beneficiary can be your spouse or another person in your life. However, that ownership transfer must have been in effect at least three years before your death to avoid taxation.

","

Surrendering or Withdrawing from Your Life Insurance Policy

","

Say you’ve been paying monthly premiums on a universal life insurance policy. The premiums you’ve paid do not yet equal the cash value of the policy. However, you decide you want to withdraw money from the policy. Any money you withdraw that is greater than the amount you paid in premiums is considered taxable income. If you surrender the policy altogether, the difference between its value and what you’ve already paid in premiums is taxable income.

","

To get around the tax implications of a withdrawal, policyholders who want access to the money in their life insurance policy can take a loan from the policy rather than make a withdrawal.

","

Bottom Line

","

With careful management of your life insurance policy you can shelter a sizable chunk of money from the IRS for your beneficiaries. The general rule with life insurance and taxes is that if you take more money out of the policy than you paid into the policy, you may trigger taxes. That goes for interest your policy earns and for money you take out yourself, in a surrender or withdrawal.

","

Tips for Financial Planning

","$48","

"],"experts":null,"link":"/life-insurance/what-to-know-about-taxes-on-life-insurance","published":{"datetime":"2017-2-6","readable":"February 6, 2017"},"shareInfo":{"title":"What to Know About Taxes on Life Insurance","origin":"/life-insurance/what-to-know-about-taxes-on-life-insurance"},"isNewsArticle":false},{"id":"cG9zdDoxOTI3MzU=","databaseId":192735,"postId":192735,"author":{"node":{"id":"dXNlcjo5OQ==","databaseId":99,"userId":99,"avatar":{"url":"https://secure.gravatar.com/avatar/67b8e9b4ee40c2b36d23ca662b66d02f?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Ashley Kilroy is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Ashley","fullName":"Ashley Kilroy","lastName":"Kilroy","name":"Ashley Kilroy","postCount":{"pageInfo":{"offsetPagination":{"total":530,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"achorpenning","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybTo0NzIy","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":4722,"categoryId":4722,"link":"https://smartasset.com/life-insurance/articles","name":"Life Insurance","postCount":{"pageInfo":{"offsetPagination":{"total":76,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"life-insurance","ancestors":null,"parent":null,"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$49","date":"2023-03-22T10:41:45","excerpt":"

\n","featuredImage":{"id":"cG9zdDoxOTI3MzY=","databaseId":192736,"altText":"what is a modified endowment contract","date":"2023-03-23T02:01:12","fileSize":27130,"mimeType":"image/jpeg","modified":"2023-03-23T02:01:12","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2023/03/senior-woman-going-through-paperwork.jpg_s1024x1024wisk20cPT0XyqDpxvReqAELOuuwxICnhFsG-PA4Isx5aufFECE.jpg","__typename":"MediaItem"},"modified":{"datetime":"2023-3-23","readable":"March 23, 2023"},"multipleBylinesByRole":{"editedBy":null,"reviewedBy":null,"writtenBy":null,"factCheckedBy":null,"secondEditor":null,"hideAuthor":null,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/life-insurance/what-is-a-modified-endowment-contract","metaDesc":"A modified endowment contract (MEC) is a cash value life insurance contract that has been overfunded to keep the full tax treatment of the policy.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":6,"title":"What Is a Modified Endowment Contract? - SmartAsset","__typename":"PostTypeSEO"},"slug":"what-is-a-modified-endowment-contract","status":"publish","title":"What Is a Modified Endowment Contract?","uri":"/life-insurance/what-is-a-modified-endowment-contract","tags":{"nodes":[],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":{"id":"dXNlcjo5OQ==","databaseId":99,"userId":99,"avatar":"$4a","description":"Ashley Kilroy is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.","additionalMeta":"$4b","email":null,"firstName":"Ashley","fullName":"Ashley Kilroy","lastName":"Kilroy","name":"Ashley Kilroy","postCount":"$4c","slug":"ashley-kilroy","__typename":"User"},"editedBy":null,"reviewedBy":null,"factCheckedBy":null,"secondEditor":null},"category":{"id":"dGVybTo0NzIy","children":"$4f","databaseId":4722,"categoryId":4722,"link":"https://smartasset.com/life-insurance/articles","name":"Life Insurance","postCount":76,"slug":"life-insurance","ancestors":null,"parent":null,"__typename":"Category"},"isModifiedBeforePublished":false,"contentBlocks":["

Life insurance policies are attractive vehicles providing tax-advantaged growth that the stock market doesn’t hinder. As a result, throwing as much money as possible into the account can be tempting. After all, who wouldn’t want to maximize their gains Unfortunately, contributing too much money into your account can result in the policy becoming a modified endowment contract. This account designation is unchangeable once assigned and produces different implications for taxes and cash value access. Here are the details and how to use the seven-pay test to stay on the straight and narrow. You may also want to work with a financial advisor to help you make the right long-term financial decisions.

","

What Is a Modified Endowment Contract (MEC)?

","

A modified endowment contract (MEC) is a former life insurance policy that has lost specific advantages due to accumulating surplus cash. For instance, permanent life insurance policies, such as whole life insurance, defer taxes on growth.

","

In addition, the policy’s cash value combines with your death benefit for a higher payout to beneficiaries. However, a modified endowment contract irreversibly restricts access to the account’s cash value until the policyholder is age 59.5. Withdrawing money before then will incur a 10% penalty.

","

History of the MEC

","

In 1988, Congress established the MEC rule because life insurance was a means to avoid capital gains taxes instead of its intended purpose of providing a death benefit for families. During the 1970s to mid-1980s, long-term capital gains taxes ranged from 20 percent to 39 percent. So, consumers could purchase life insurance policies that allowed hefty upfront payments or a single premium payment and defer taxes on the accumulated cash value.

","

In addition, they could take out tax-free loans from the policy, which could last a lifetime and be repaid from the eventual death benefit. However, the Technical and Miscellaneous Revenue Act of 1988 stopped this practice by introducing the “seven-pay” test, which identifies policies bought for investing and tax-sheltering instead of the death benefit and gradual growth.

","

What Is the Seven-Pay Test?

","

The seven-pay test is how the government determines if a life insurance policy turns into a MEC. Specifically, the test limits how much the policyholder can deposit annually during the first seven years. If the policyholder exceeds the limit with their contributions and doesn’t initiate a refund for the overage, the policy becomes a MEC.

","

For example, say you open a $250,000 life insurance policy. It has a $5,000 MEC deposit limit. So, you can deposit $5,000 per year for the first seven years of the policy. However, if you were to deposit over $5,000 during any of those seven years, the government would consider the policy a MEC and tax it accordingly.

","

This rule applies even if you try to make up for a year when your contributions for $5,000. For instance, funding the policy with $4,000 in year one and $6,000 in year two would put your policy into MEC status. Fortunately, if you overpay into your policy, your insurance company will notify you. Then, you can opt for a refund of the surplus payments to retain your policy’s status.

","

Lastly, it’s key to remember that policies that went into effect before June 20, 1988, aren’t subject to this law because it wasn’t in place yet. Plus, after the first seven years, the rule goes away for your policy unless you make a major adjustment, such as raising the death benefit.

","

Pros and Cons of MECs

","

As outlined above, MECs lose the cash value component of the death benefit. For instance, a $250,000 whole life policy that has accumulated $75,000 offers substantial cash reserves. However, if it becomes a MEC, you lose access to that money until age 59.5 unless you’re willing to pay a 10% withdrawal penalty.

","

In addition, your policy gains the same tax status as a non-qualified annuity, meaning you pay taxes on earnings. The final drawback is that MEC status is permanent once it occurs.

","

On the other hand, MECs still provide a death benefit to your beneficiaries. Plus, you’ll still experience the steady growth your life insurance policy originally offered and avoid the unpredictability of the stock market.

","

MEC vs. Life Insurance Contract

","

MECs differ from life insurance contracts because life insurance contracts don’t penalize withdrawals if the policyholder is younger than 59.5. Conversely, MECs impose the penalty. Plus, permanent life insurance policies have distinct tax-deferral advantages, while MECs have similar taxation as non-qualified annuities.

","

MEC Tax Consequences

","

Permanent life insurance policies shield earnings from taxes, meaning your money grows faster. Plus, you can take withdrawals or loans from your policy without incurring taxes if the amount is under the policy’s cost basis.

","

In addition, you don’t have to be a specific age to touch the money in your life insurance policy. Contrastingly, MECs lack these benefits. When you withdraw funds, your earnings come out first, meaning you pay income taxes on withdrawals. Plus, you must wait until age 59.5 to withdraw cash or pay a 10% penalty to do so beforehand.

","

Who Can Benefit from MECs

","

Although MECs experience a downgrade from a typical permanent life insurance policy, they still provide advantages. Specifically, if you want a tax-advantaged payout for your beneficiaries and aren’t bothered by overfunding your policy, a MEC can help. In addition, you won’t pay taxes on the money in your policy until you withdraw it. Therefore, high net-worth individuals might find MECs desirable.

","

The Bottom Line

","

A MEC is a life insurance policy that has received excessive deposits over the first seven years of its existence. Violating the seven-year rule produces an irrevocable change to the policy and it becomes a MEC. Your access to the policy’s cash is limited to age 59.5 and you might pay more taxes on the policy than originally planned. However, MECs still retain the primary function of life insurance: providing a hefty payout to beneficiaries upon the policyholder’s death.

","

Modified Endowment Contract Tips

","$51","

"],"experts":null,"link":"/life-insurance/what-is-a-modified-endowment-contract","published":{"datetime":"2023-3-22","readable":"March 22, 2023"},"shareInfo":{"title":"What Is a Modified Endowment Contract?","origin":"/life-insurance/what-is-a-modified-endowment-contract"},"isNewsArticle":false}]}]