Understanding Life Insurance Settlements
Life insurance settlements typically refer to the payout beneficiaries receive after the policyholder’s death. The general rule is that these payments are not subject to federal or state income taxes. That means, in most cases, when a beneficiary in New Jersey receives a lump sum from a life insurance policy, they are not required to pay income tax on that amount. This rule applies not only to New Jersey residents but also to out-of-state beneficiaries who receive life insurance benefits from a New Jersey-based policy. The IRS states that life insurance proceeds are not taxable to the beneficiary unless the policy was transferred for value, which usually happens in certain business transactions or when a life insurance policy is sold for investment purposes. This transfer-of-value rule is relatively rare and does not affect most individual beneficiaries. Estate Taxes and Life Insurance
While life insurance settlements are typically not subject to income tax, they may be subject to estate tax. In some cases, the value of the life insurance policy may be included in the deceased’s estate, depending on how the policy was structured and who owned it. If the life insurance policy is part of the estate, and the total value of the estate exceeds the federal estate tax exemption, estate taxes may apply.
New Jersey Inheritance Tax
New Jersey’s inheritance tax applies to life insurance payouts when the beneficiary is not an immediate family member. Immediate family members, including spouses, children, parents, and grandchildren, are exempt from paying inheritance tax on life insurance proceeds. However, other beneficiaries, such as siblings, nieces, nephews, and non-relatives, may be subject to the New Jersey inheritance tax. New Jersey inheritance tax rates vary depending on the relationship between the deceased and the beneficiary, and the amount of the inheritance. The tax rates range from 11% to 16%, with higher rates applying to more distant relatives or non-relatives. For example, a sibling might face a 15% tax rate on the life insurance payout they receive.Interest Earnings on Life Insurance Proceeds
If a beneficiary chooses not to take a lump sum payout and instead leaves the life insurance proceeds with the insurance company for a period of time, any interest earned on the payout is considered taxable income. This means that if the policyholder’s life insurance company places the proceeds in an interest-bearing account before distribution, the beneficiary will be required to pay income taxes on any interest earned during that time.
We contacted Trief & Olk to help us with a life insurance issue and Shelly Friedland was the attorney assigned to our case. Before Shelly took our case she explained to us that the likelihood of our success without going to court was possible but not likely. Unfortunately we did not get the outcome we had hoped for but it was our decision to not move forward and have our case litigated. Shelly is very knowledgeable and was very straight-forward in her assessment of our case as we moved forward. She was very patient and thorough in answering our questions. She always responded in a timely manner and listened to our concerns. We would certainly recommend Shelly and would use her firm again in the future.”
- John Ramig
If there is any possibility of winning your life insurance case – this is the place to do it for you. They are efficient, honest and will achieve the best possible outcome.
Shelly Friedland worked on my case where a life insurance policy had lapsed and was even a few days beyond the grace period. Farmers had rejected my claim twice and was unwilling to take a second look. Shelly was able to get them to pay the entire claim without going to court, and the full amount was deposited in my account within a couple months. Highest recommendation.”
- Kathleen Brown
Trief & Olk is a superior law firm. Their attorneys and other legal professionals have a brilliant understanding of the law and the litigation process. They diligently perform their work in an efficient, strategic and cost-effective manner to ensure the best possible outcomes for their clients.
- Christopher Hughes