Personal & Financial Strategies

Life Insurance: A Treasured Gift to Loved Ones

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Life insurance is an important expense, and it’s something we can easily help our children and grandchildren to obtain. Tom Graceffa, of COUNTRY Financial, explains why this tax-free gift keeps on giving.

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Everyone likes to give gifts. It’s a pleasure to watch the warm, glowing smile of a loved one who treasures the gift he or she received.

A gift that will be treasured forever is a rarity. However, there‘s one that can go a long way toward fulfilling your aspirations of a gift that will last forever. Long after the candy is gone, the toys are broken and the clothes are outgrown, this gift will continue giving and increasing in value. It’s the gift of life insurance.

Life insurance is an appropriate gift for two reasons. First, a child or grandchild can utilize the cash value in a whole life insurance policy to defray future education expenses, or to supplement retirement benefits.

Second, making a gift of cash for the purchase of life insurance removes the gifted cash from inclusion in the gross estate of the donor for federal estate tax purposes, and provides life insurance protection for the child or grandchild in later years.

A gift of life insurance also demonstrates the importance you place on insurance. This helps to educate the child in the area of insurance and to build a solid foundation for future financial programs.

Life insurance purchased on the life of a young child or grandchild is relatively inexpensive because it’s based on the child’s current health. Since the premiums are low, it’s possible to build a solid foundation for your child or grandchild with only one premium.

Purchasing a policy for a young person can guarantee the child insurance protection when he or she is older and starts a family. It also helps since a child’s future insurance needs may dwarf your own.

You may consider setting up an irrevocable insurance trust for your child or grandchild. However, every precaution should be taken in establishing and funding an irrevocable insurance trust, if the desired tax benefits are to be realized. If there is any connection between the insured and insurance policy, the IRS may try to establish that the trustee is merely an “agent” of the insured. This could cause the policy to be included in the estate of the donor. You should contact your attorney and/or accountant to learn more about establishing an insurance trust.

There are several tax advantages in choosing life insurance as a gift for a child or grandchild. One advantage is that, each year, a $13,000 gift can be given tax-free. If your spouse participates, the maximum annual tax-free gift is $26,000. The gift is also removed from your estate.

Each year you don’t take advantage of the gift tax law, you are increasing the value of your estate and the estate taxes that will be paid. In addition, you may be unintentionally disinheriting your children and grandchildren, since their inheritance would go toward paying estate taxes.

Tom Graceffa is a licensed financial representative at COUNTRY Financial, 4190 W. Euclid Ave., Rolling Meadows.

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