When to file claim on life insurance

November 6, 2007 5:48 PM

Going to inherit money. Don't know how much. Have to file life insurance claim. Friends say I should wait 'till after the 1st of the year to file the claim, so it'll show up n next years taxes. I say it doesn't matter, since I'm planning on getting with an financial advisor and pay/take out the tax amount before spending any. Who's right? This is in America.
posted by MichaelKnight to Work & Money (14 answers total)

Talk to the financial advisor first?
posted by LobsterMitten at 5:49 PM on November 6, 2007 [1 favorite]

If the amount is going to be substantial, it may be worth talking to a financial advisor early. At least try to figure out whether or not the benefit will be taxed (I think in the US they are generally not taxed, but I am not in any way an expert).

If they are not taxed, I think you want get the money into your possession as soon as possible, so that you can at least invest it.
posted by justkevin at 6:00 PM on November 6, 2007

Isn't life insurance generally tax free?

Supporting Link
posted by BackwardsCity at 6:01 PM on November 6, 2007 [1 favorite]

I am a financial advisor, but not yours. And I'm not an expert on U.S. personal income taxes, and everybody's tax situation is different.

Okay, having said that, I'm almost positive that life insurance death benefits aren't taxable. Let your advisor confirm that, obviously, but probably you shouldn't have to worry about it.

FWIW, these guys seem to agree. The wrinkle they get into is whether any interest has accrued on the benefit between the time of death and the time you collect. You pay taxes on that interest only (just like you would if you collected the benefit at death and earned the interest from your bank.)
posted by Opposite George at 6:06 PM on November 6, 2007

Your friends are crazy. From the IRS FAQ on life insurance: Generally, if you receive the proceeds under a life insurance contract because of the death of the insured person the benefits are not taxable income and do not have to be reported. Any interest you receive would be taxable and would need to be reported just like any other interest received.
posted by crazycanuck at 6:06 PM on November 6, 2007

Or, what BackwardsCity said (shoulda previewed...)
posted by Opposite George at 6:07 PM on November 6, 2007

Response by poster: Ok, wow, that's a wrinkle.

How do you find a good financial advisor. What do you look for?
posted by MichaelKnight at 6:14 PM on November 6, 2007

FWIW, I paid no taxes on the money I received from my mother's life insurance when she died.
posted by trip and a half at 6:25 PM on November 6, 2007

Life insure proceeds, payable due to the insured's death, aren't generally included in gross income for the purpose of the U.S. federal income tax.

With that out of the way, cash method taxpayers are subject to the "constructive receipt" rule, which can force the inclusion of an item of income in the first taxable year during which the taxpayer could claim the item at will. Basically, your friend's scheme might not have worked anyway.
posted by Mr. President Dr. Steve Elvis America at 6:34 PM on November 6, 2007

Looking for a financial advisor, choose one that you can pay a flat rate and who isn't going to get paid with a commission for selling you some crappy stock or investment. Lots of people call themselves financial advisors, but many of them are really sales people selling you their companies mutual funds and whatnot. Not that that is inherently bad, but it is to say they are not being objective and have something to gain if you purchase from them. You need someone who is a "free agent" who is well versed in all kinds of investments and can make a good suggestion for your particular circumstance. Good luck!
posted by 45moore45 at 7:55 PM on November 6, 2007

What 45moore45 said. Unfortunately, this is exactly how the "financial advisors" at most of the big firms (I won't mention any names but you see the ads on TV all the time) make their money.
posted by Opposite George at 8:07 PM on November 6, 2007

For a reliable answer to the "is it taxable" question talk to a tax accountant or tax lawyer, not a financial adviser.
posted by randomstriker at 8:07 PM on November 6, 2007

When my husband died in 2005, his life insurance was not taxed, but the interest earned on the account the insurance went into was taxed.
posted by ittybittyteenyweenyyellowpolkadotbikini at 9:08 PM on November 6, 2007

How do you find a good financial advisor. What do you look for?

Here's a good place to start. NAPFA has all fee-only advisors, which means no hidden commissions or hidden agendas. You need to register to do a search for member advisors near you, but I did, it's free, and I haven't gotten any spam.
posted by daisyace at 7:47 AM on November 7, 2007