How Does Life Insurance Work?

By | August 31, 2021
How to buy Life Insurance

How Does Life Insurance Work?. The primary purpose of life insurance is to ensure that the people that matter most to you have enough money after your death. Although it’s an essential piece of your financial picture, around 40% of adults in the U.S. have no life insurance, according to a 2019 survey by employee benefits provider Unum. Use our comprehensive guide to understand how life insurance works and learn how to get the right policy for you.

Though the names can be confusing, life insurance policies boil down to two main categories: permanent and temporary. Each type requires a premium – often paid monthly – and all policies have a death benefit.

Permanent life insurance includes whole life and universal life. They are designed to stay in place for the rest of your life, which is how these policies earn the “permanent” status.

You can learn more about Whole Life Insurance and Universal Life Insurance in our separate articles.

Temporary life insurance is commonly called term life insurance. The “term” is the amount of time that the policy is active, and your beneficiaries only receive a death benefit if you die within this amount of time. Typical terms are 10, 20, and 30 years. After the term expires, the policy ends and you no longer have coverage. 

The death benefit is the money that the life insurance company pays to your beneficiaries after your death. The amount of the death benefit depends on how much coverage you have. Setting this amount is one of the most important decisions you’ll make when buying life insurance. Coverage amounts can range from a few thousand dollars to a few million dollars. Find out how to estimate your coverage requirements in our How Much Life Insurance Do I Need? section below.

You’ll name one or more beneficiaries of your life insurance policy. These are the individuals that receive the death benefit. A trust or organization can also be a named beneficiary. If you want to leave someone money who is currently a minor, or who otherwise may not handle the money responsibly, consider setting up a trust instead. After your death, the money from the death benefit goes into the trust. The trustee, whom you also designate, oversees your trust and can manage how much and when the beneficiary gets the money.

Premiums are what you pay for the policy. You may pay a large sum upfront, or your premium may be in the form of monthly or annual payments. If you cancel, there is typically no refund of your premiums. We compare sample rates for different types of life insurance policies in our How Much is Life Insurance? section below.

Some permanent policies have a cash value component. This is a portion of your premium that grows tax-deferred as if it is in a retirement account. You can borrow against your cash value if your policy allows, though you typically will pay fees and interest to use this money. In general, after your death, any cash value in your account is kept by the life insurance company and does not go to your beneficiaries.

When you are ready to buy life insurance, make sure you are working with a reputable insurance agent or broker that gives you advice based on your needs, not based on the amount of commission they will earn. For example, whole life insurance policies typically reward a broker with a healthy commission, which causes unscrupulous brokers to recommend it, even if it isn’t the best life insurance policy for you. If you don’t already have a relationship with an agent or prefer not to work with one, you can also contact a life insurance company directly to get a quote. See our How to Buy Life Insurance section below for step-by-step instructions on buying life insurance.

It’s also essential to buy insurance from a company that’s trustworthy and reliable. We rate the Best Life Insurance Companies, basing our scoring on factors such as cost estimates, availability, and policy features. Our list of the Cheapest Life Insurance Companies consists of highly-rated companies with affordable policies.

Is Life Insurance Worth It?

If you have a family that depends on you financially, life insurance is likely worth it. You may need life insurance to replace your income after your death so that your loved ones can afford their monthly bills. If you forgo life insurance, your spouse may have to sell the family home if they can no longer afford the mortgage. Other major expenses, such as your child’s college tuition, will also be impacted if your income disappears.

Life insurance can pay for end-of-life expenses such as medical bills, as well as for your funeral. Burial costs typically range from $8,000 to $10,000 – a pricey expense that may decimate your family’s savings if you don’t have life insurance. If you are taking care of aging parents, you’ll need additional funds so that there is no lapse in payments for their medical bills or assisted living facility.

You might also use life insurance to leave behind a legacy. You can name a charity that is important to you as one of your beneficiaries. After your death, the organization receives this money the same as if you wrote them a check directly.

You do not need life insurance if you don’t have any loved ones that rely on your income. An unmarried adult with no children may fall into this category. Those with substantial savings and investments may choose to “self-insure.” This may be an appealing choice if the value of your estate is far greater than your debts. In this situation, your heirs use your assets to first cover any remaining payments after your death and then can benefit from any remaining money.

Similarly, when you are ready to retire, you may have enough resources through retirement accounts and other savings. After your death, if these assets are enough to cover your debts and funeral expenses, then you may not need life insurance. As always, it’s important to talk to a financial advisor about your particular situation.

Is Life Insurance a Good Investment?

Life insurance is a good investment when you keep its main function in mind: to ensure there will be financial support for the individuals and organizations you care about after your death. This is an important part of financial planning, though the insured never reaps its biggest advantage, the death benefit.

When it comes to building wealth while you are still alive, there are better investments than life insurance. This is true for all types of products. Term life policies have no value other than the death benefit, and canceling term insurance early generally does not result in a refund of premium payments unless you have paid extra for return-of-premium term insurance.

Whole life insurance, variable life insurance and other types of permanent policies sometimes blur the lines between insurance and investment because of the cash value and dividend components. The cash value refers to a portion of your premiums that is set aside by the life insurance company. The name is misleading, as the chief purpose of this money is to keep the costs of your premiums the same as you age, not to build wealth. These funds are typically only available for use while you are alive, and can only be taken out as a loan, which must then be paid back.

Some policies pay dividends. This is extra revenue earned by the life insurance company that the company then pays back to the policyholder. With a variable life policy, you choose how the cash value is invested. The investment options are similar to mutual funds, and some selections pay dividends.

Your money tends to grow faster with other investment tools, rather than with a life insurance policy, making this a slow vehicle for creating wealth. This is partly because the amount of money you receive in the form of dividends depends on your policy’s cash value. Accumulating enough cash value to earn a significant amount of money from your dividends takes time. Additionally, these types of policies also tend to have higher fees than many types of mutual funds. “Substantial fees, expenses, and tax implications generally make variable life insurance unsuitable as a short-term savings vehicle,” states the U.S. Securities and Exchange Commission. Before you select this type of policy to grow your assets, consult a financial planner to see if there are other options available that offer a higher return on your investment.

What Type of Life Insurance Do I Need?

There are five main types of policies to consider: term life, whole life, universal life, variable life and variable universal life. Selecting the best policy for you depends on how much you can afford to pay for the premiums, how long you want coverage, if you want the ability to borrow against your policy, and if you want to receive a small amount of income later in life in the form of dividends.

Term tends to be the least expensive and the least complicated type of insurance. It appeals to many because its premiums usually are a fraction of the cost of a permanent policy. The length of coverage ranges from five to 30 years. For most adults in their 30s or older that plan on retiring in their 60s, this is long enough to replace any income from employment and to ensure that your loved ones get a similar level of financial support as if you were still working.

At the end of the term, some companies offer the option to change the policy into a permanent policy with few to no fees and sometimes no medical exam. This is known as a convertible term life insurance policy. This option provides the coverage you need right now at an affordable price, while allowing you to decide later if you want to convert your coverage into a long-term policy. Companies that offer the option to convert term insurance without a medical exam provide extra peace of mind against a future medical diagnosis.

Whole life insurance is a good choice if you want guaranteed coverage until your death. This type of permanent policy never expires as long as your premiums are paid. With some policies, you can choose to pay the premiums monthly, annually, or in a lump sum. The cost is significantly higher than with term life, so make sure the higher premiums fit comfortably into your budget. A cash value component helps your premiums stay the same throughout your lifetime, and some whole life policies pay dividends after several years, which you can use to supplement your income during retirement.

Universal life is similar to whole life, but with more flexibility when it comes to changing your premium amounts, premium payment frequency, and coverage. If you lose your job or your budget becomes strapped for other reasons, you can adjust your policy to a lower premium that you can afford. Some companies offer lapse protection, which taps into your cash value to temporarily pay your premiums during financial hardship. You can raise your coverage when you have the ability to pay a higher premium or lower your coverage as your net worth grows enough to help provide for your loved ones.

Variable life is based on either a whole life or a universal life policy. It starts with all the same features of these policies and then adds an investment component. With a variable life policy, the insurer decides how the cash value is invested. Selections may include an index, such as the S&P 500, or different mutual funds.

Your cash value is likely to grow more with a variable life policy than with a traditional permanent policy. Because the cash value is often tax-deferred, you won’t pay any taxes on your gains until you withdraw the money. However, because of the complexity of the investment component, a variable life policy is an appealing choice only if you are well-versed in financial planning. The fees also tend to be much higher. Its management fees – also called basis points – are complicated, as they are often based on a percentage of your returns. If there is no guarantee on a rate of return, your potential growth depends on the market, just like with a typical mutual fund.

How Much Life Insurance Do I Need?

The right amount of life insurance coverage depends on your personal situation. You may want the money to replace your income for as many years as your beneficiaries need it, cover your debts and end-of-life expenses, and/or provide for one-time expenses such as a child’s college tuition. Around 20% of those with life insurance say their coverage is too low, according to the Insurance Information Institute (III). A few easy calculations can keep you out of this group.

The quickest way to estimate your coverage needs is to multiply your annual income by five or 10. This simple calculation is a good way to get a ballpark idea, but it isn’t very precise and should be followed up with a more thorough review of your needs.

Start your in-depth assessment by taking a look at your annual income. If you have a spouse or child who depends on your income, calculate how much they need to live on each year and multiply it by the number of years they need this income. A surviving spouse that reaches retirement, for example, may be able to live comfortably with income from the retirement accounts and may not need extra life insurance for those years. As children move out of the house and become financially independent, they become less reliant on your income.

If you don’t contribute directly to the household’s total income, consider other ways you are supporting your family. For example, a stay-at-home parent may not be depositing any income into the bank account, but their death can lead to unexpected bills. The surviving parent may need to hire someone to help clean the house, prepare meals, and drive the kids to school. Consider these added costs when estimating life insurance if you don’t work outside of the home.

Add in the cost of any large one-time expenses and debts. College tuition tends to be the largest expense in this category. The average tuition, fees and room and board for an in-state, four-year school costs $21,950 per year, according to The College Board.

Other large expenses you may want to account for include assistance with a child’s wedding or house. Your spouse may want to pay off the mortgage or plan for a sizable purchase. They may need to pay off your credit cards, car loans, and any other debts. Heirs may owe estate taxes after your death. Caretakers looking after aging parents may have medical bills and nursing home expenses. Those wishing to leave behind a legacy may also want to add charitable donations to their coverage calculations.

Include expenses for your end-of-life needs. Between funeral costs and possible medical expenses, your family may have to come up with several thousand dollars after your death. Though medical bills may be difficult to account for, you can include estimates for your service and burial. Funeral costs for a traditional service typically run from $8,000 to $10,000. For more information, see our guide on what Funeral Costs to Plan For.

The next step is to consider your current assets. From your above total, subtract any other life insurance policies you have. Additional assets to take into consideration include real estate, business investments, retirement accounts, cash accounts, stocks and mutual funds, and other investments. Deduct any of these assets from your liabilities to calculate how much life insurance you need.

Any time you have a major life change, you should reevaluate your life insurance coverage. Situations such as changing jobs, moving to a different state, getting married, having a child, or getting a divorce may impact your coverage needs.

How Much is Life Insurance?

The good news is that life insurance probably doesn’t cost as much as you think it might. “Consumers overestimate the cost of life insurance, especially younger generations,” says the Insurance Information Institute, adding that “44 percent of Millennials overestimate the cost at five times the actual amount.”

The biggest factor that affects your costs is the type of policy you select. Your selections for policy length and coverage level will also impact your costs. That’s good news for budget-minded shoppers, as you can adjust these elements to create a policy that is more affordable.

Your premium amount is tied to your current age. How healthy you are will also probably impact your premiums. A life insurance company assigns you a category based on your health and lifestyle. If you have health-related issues, you may want to consider a policy that doesn’t require a medical exam. We talk more about No Exam Life Insurance here. Smoking cigarettes and using other forms of tobacco can drive your premiums up drastically. An insurance company may also take into account dangerous hobbies or other risky activities.

To show how much life insurance may cost, our study uses standardized profiles. Our sample female profile is for a non-smoker with average health who wants a $1 million policy. At age 30, the average premium for a 20-year term policy is $51.26 a month. This policy for a 60-year-old woman with the same profile costs about eight times more, with an average monthly premium of $450.91.

The cost differences between term and permanent policies are drastic. A 30-year female in our sample profile will pay, on average, about $84 a month for a 30-year term life insurance. In comparison, the average universal life insurance policy is $531.82 a month (just over six times the term policy). The average monthly premium for a whole life policy climbs to $706.25.

Cost Comparison By Life Insurance Policy Type for Women

Life insurance premiums tend to be more expensive for males. Our sample male doesn’t use any tobacco products, is in the Standard Plus risk category with average health, and is buying a $1 million policy. For a 30-year-old male, the sample cost of a 20-year term policy is $97.37. This same policy for our 30-year-old sample female is $83.58.

Cost Comparison By Life Insurance Policy Type for Men

Your life insurance premiums are based on the risk category that the life insurance company assigns you. There are four main groups for non-smokers: Preferred Plus Non-Smoker, Preferred Non-Smoker, Standard Plus Non-Smoker, and Standard Non-Smoker. For smokers, the categories are similar in name and qualifications.

Risk Class Cost Comparison for Women

The Preferred Plus is the diamond tier, reserved for those who are in excellent health currently. These individuals fall within normal ranges for weight, blood pressure and cholesterol, and have a clean bill of health. They don’t have any parents or siblings who died from cancer or heart disease before the age of 60. There is no record of risky behaviors, and their driving record has no convictions for moving violations, collisions, or drunk driving.

You fall into the Preferred group if you are generally in good health overall but closer to the upper limits when it comes to your weight-to-height ratio or your blood pressure. Just as with the Preferred Plus class, there can be no history of death from heart disease or cancer by a close family member under the age of 60.

Individuals in the Standard Plus category may be receiving treatment for a medical diagnosis, but all of their health metrics are still within the normal range.

Most people fall into the Standard group. Some allowances are made for medical treatments or for being overweight, as well as for the death of one close family member before 60 from cancer or heart disease.

Risk Class Cost Comparison for Men

If you fall outside of the typical health or life expectancy profile, the insurance company may assign you a Table Rating. Each level gets a letter (A, B, C and so on). As you move up each level, your life insurance premium increases by 25%.

How to Buy Life Insurance

Unlike other types of insurance, which you usually reevaluate every year or so, your life insurance policy covers you for years or even decades. That’s why it’s particularly important to select the right policy from the beginning. “Do not buy life insurance unless you intend to stick with your plan,” advises the National Association of Insurance Commissioners. “It may be very costly if you quit during the early years of the policy.”

The key to getting the right policy is to fully understand why it’s the best one for you. A good online guide or a knowledgeable insurance agent is instrumental in learning about the different types of policies and is crucial if you aren’t familiar with the jargon associated with life insurance.

Start your process by choosing the type of policy that you want. There are permanent plans that cover you for the rest of your life (whole life and universal life), plans that cover you for a set number of years (term life), and plans that also act as an investment (variable life and universal variable life). If you are choosing term life, decide how many years of coverage you want. Depending on the life insurance company, you can choose terms from five to 30 years. Not all policies are available for every age, so check eligible age limits before you apply.

We cover the pros and cons of each type in our What Type of Life Insurance Do I Need? section above.

Calculate the amount of coverage you need by estimating the amount of income the death benefit should replace, any large debts or expenses it needs to pay and any gifts you want to make. We walk you through this series of calculations in our How Much Life Insurance Do I Need?section above.

Your premium goes up or down depending on the type of policy you select and by adjusting your death benefit. Whether you decide on monthly or annual payments, make sure that you will have room in your budget for years to come to cover these expenses.

Each company has a different application process. Some have an online process that lets you skip talking with an insurance agent. Other companies require you to connect with one of their agents to apply, though a few of these let you first get a quote online. A broker works with several insurance companies and usually acts as your point of contact.

The application includes a series of personal questions. Financial questions cover your annual income and net worth. Lifestyle questions inquire about your regular exercise routine, nicotine and alcohol use, and risky behaviors such as dangerous sports or recreational drug use. Health-related questions ask about height, weight, prescription medications, and medical diagnoses.

Most life insurance companies follow up with a medical exam. This is conducted by a licensed professional and may take place in your home, office or a nearby clinic, depending on the company. Similar to an annual physical, the examiner will check your height, weight, blood pressure, and heart rate. In addition, blood and urine samples will be collected. These typically screen for STDs, as well as prescription medications, nicotine, and other substances. Your samples may also be used to check for factors that point to a serious pre-existing condition such as heart disease, diabetes, or kidney disease. The exam may include an EKG, a treadmill test, or similar exams.

Even if you have a serious illness, including cancer, you are insurable. However, your premiums likely will be higher. Look for a company that covers your specific medical condition. For example, Banner Life Insurance offers term life, universal life, and guaranteed whole life policies to individuals with particular types of cancer.

The results of your medical exam and your answers to the personal questions go to an underwriter. They verify the information on your questionnaire and may disqualify you if you are caught lying. The underwriter identifies whether you’re a smoker. They assign you a risk category (Preferred Plus, Preferred, Standard Plus, or Standard). The underwriter may give you a table rating if you have a serious diagnosis or a close relative who died prematurely from cancer or heart disease.

Your eligibility for a life insurance policy and the amount of your premium are dependent upon the underwriter’s evaluation. The insurance company also uses the evaluation to decide if it will approve or deny your application. Be prepared to sit tight for a few weeks, as this part of the application process can be lengthy, especially if additional medical tests are required.

Not all plans require a medical exam. If you have concerns over your health or medical records, you may want to choose a policy that doesn’t require this step, though you will still need to fill out a health questionnaire. We explain the advantages and disadvantages of this type of policy in our Life Insurance with No Exam guide.

For more information on selecting the right life insurance policy for you, deciding how much life insurance you need, and guidance on picking an insurance agent, see our How to Buy Life Insurance guide.

How to File a Life Insurance Claim

  1. Locate the life insurance policy.
  2. Read the policy to understand who the beneficiaries are, how the death benefits are divided between them, the total coverage level and the options for receiving the death benefits.
  3. Contact the life insurance company and request a death benefit claim form.
  4. Obtain a copy of the death certificate.
  5. File a claim with the life insurance company.

After your death, your beneficiaries must file a claim in order to receive death benefits. It is easiest to file a claim if your beneficiaries have a copy of your life insurance policy. This lets them know what company underwrites your policy and how to contact it. It also provides information on the amount of your death benefit and how it will be shared if there are multiple beneficiaries.

Your beneficiaries will need to provide the insurance company with a death certificate. The insurance company will also have a claim form that needs to be filled out and submitted. A police report or other official statement may be required if the cause of death was an accident. If you have more than one beneficiary, each one must file a separate claim.

Once the insurance company has reviewed this information and verified that the premiums are current, they will pay the death benefit to the beneficiaries. It typically takes anywhere from a few days to a few weeks from the time you submit the application to when the benefits are paid.

Beneficiaries should make sure to file a claim with every applicable life insurance company. For example, some people have a group policy from their employer in addition to a policy that they purchased.

You can ensure that this process is as painless as possible by making sure that your loved ones know where your important paperwork is. Tell your spouse, children or other beneficiaries where your life insurance documents are. For good measure, share a photocopy of your policy with any adult beneficiary or trustee of your estate.

If you need to file a life insurance claim and don’t have a copy of the policy, first try to find out which company the policy is through or which agent sold it. The company or agent should be able to find it in their records.

If you still aren’t able to find the policy, the National Association of Insurance Commissioners may be able to help. Its Life Insurance Policy Locator Service sends your request to participating insurance companies, which then search their databases. Some states offer a similar service. Contact your state’s insurance commissioner to find out if this is available in your area.

Life insurance claims are paid out either as one large lump sum or split into smaller installment payments. The installment payments may be based on a set amount of time or in a specific dollar amount. You may have the option of taking out only the interest, reserving the principal for your heirs. A claim may also be converted to an annuity, which acts as regular income during your retirement. The payment options that are available to each beneficiary depend on the terms of the life insurance policy.

What Does Life Insurance Cover?

The purpose of a life insurance policy is to pay money to your beneficiaries after your death. Though this seems straightforward enough, there are some situations that may not qualify for a payout of the death benefit. Every policy is different, so it’s important to read the fine print if you are making a claim under unusual circumstances.

Most deaths by natural causes are covered by life insurance. Under the umbrella of natural causes are old age, heart attacks, cancer, respiratory disease, stroke and Alzheimer’s disease, among others. If you die within two years of obtaining your policy, the life insurance company may conduct an investigation to make sure you were honest in your application. Any misrepresentations on your application may result in a denial of death benefits. For example, if you aren’t upfront about a recent medical diagnosis, or you don’t mention that you occasionally skydive or go on an annual scuba diving excursion, the claim may get denied, even if your cause of death has nothing to do with the omissions. Accidental death and dismemberment insurance policies do not pay out claims for death by natural causes.

Accidental death is typically covered by traditional life insurance. Accidental poisoning is the most common example of a non-natural death, according to the Centers for Disease Control and Prevention (CDC), followed by car accidents, and unintentional falls. An accidental death and dismemberment policy also pays a death benefit in this instance. That means if someone has both a life insurance policy and an accidental death policy (or an accidental death rider), their heirs can receive a death benefit from both. A separate policy covering accidental death is not always worth the cost, as it’s pretty rare. The CDC estimates that 6% of all deaths fall in this category.

Death by violent means is generally covered. This includes murder. The life insurance company will likely deny a claim for any beneficiary that is convicted in the policyholder’s death. Many companies exclude war, whether it’s declared or undeclared, from life insurance coverage.

Airplane accidents are another common exclusion for many life insurance policies. This sometimes extends to commercial air travel, but typically only affects pilots and flight crew. If you want coverage for a potential plane crash but your life insurance policy doesn’t cover it, consider getting an accidental death policy or rider. Make sure that the fine print provides for the type of airplane accident that relates to your needs.

Your heirs will not receive death benefits if your life insurance policy has expired. For example, at the end of a 10-year term life policy, the coverage is no longer active, and no death benefits are paid because you outlived the policy. Any lapse in your premium payments may also result in policy cancellation unless special arrangements have first been made with the life insurance company.

If you die while committing a crime or participating in illegal activity, your life insurance company may deny the claim. An alcohol-related accident such as drinking and driving, or a death that’s connected with the use of recreational drugs, may result in a denial.

It is important to be truthful and upfront in your application. If the life insurance company uncovers any fraud, they may not approve your beneficiary’s claim. The first two years after your application is called the contestability period. If you die during this time frame, the life insurance may investigate to see if there are any misrepresentations from your application. Lying about smoking or about a medical diagnosis when you applied for insurance, for example, will result in your beneficiary’s claim being denied if you die during the contestability period. The cause of your death does not have to be connected with any deceptions in your application for the claim to be denied on the basis of fraud.

Does Life Insurance Cover Suicide?

When the cause of death is suicide, most life insurance policies will approve a claim only if the policy has been fully active for two years. Any lapses in the policy – like if the premiums weren’t paid on time – tend to restart this two-year period. The fine print also typically clarifies that it makes no difference whether the policyholder is designated as sane or not. No matter how large the benefit from any life insurance policy you may have is, it is not worth more to your loved ones than having you around.

Suicide is the tenth leading cause for death in the U.S. The CDC reports that 47,000 deaths each year are the result of intentional self-harm. Even more disturbing, these rates have been steadily increasing since 2005.

If you are contemplating suicide, help is available. Call any time of day for free, confidential support from the National Suicide Prevention Line at 800-273-8255. The organization also operates more than 150 crisis centers that offer encouragement and local resources. A number of different treatments have been shown to help, ranging from different types of therapies, medication, and skills training. Sometimes the solution is a combination of more than one of these approaches.

You can also call the National Suicide Prevention Line if you have concerns that someone you love may be thinking about suicide. The crisis line can offer advice and support to help understand and cope with this difficult situation.

Is Life Insurance Taxable?

Life insurance benefits are not taxable when your beneficiary is your spouse or your child and they elect to receive the payout as a lump sum. If the death benefit is paid out in installments, then the life insurance company often pays interest on the remaining balance. This interest is frequently taxed as income.

Some permanent policies also earn interest from the cash value. This interest grows tax-deferred and is typically only subject to taxes if the insured takes out a life insurance loan that exceeds the total cash value. Dividend payments are generally not taxable when the payout amount is less than the amount of premiums you have paid.

When the named beneficiary is anyone other than your spouse or child, the death benefit is added to the value of your entire estate. For estates that fall below the federal and state estate tax exemptions, there are no taxes. For 2019, the IRS doesn’t require the filing of an estate tax return and doesn’t assess taxes if the total value of your estate is less than $11.4 million per individual.

For example, if your beneficiary is your sister, she will only pay estate taxes if her total inheritance exceeds $11.4 million. To calculate this amount, add the value of your home, life insurance, and any other assets. Subtract any debts (such as a mortgage) that your sister will need to pay after your death. The final number is the estate’s net value. Estates that surpass the $11.4 million exemption may be subject to 40% federal estate taxes.

Some states also levy an estate tax. The exemptions limits are much lower, ranging from about $1 million to $5.6 million. The tax rates range from about 12% to 20%.

This advice addresses life insurance taxes in a general sense, and may or may not be applicable to your specific set of circumstances. We recommend talking with a tax professional to learn more about the tax implications for your situation.

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