Free Life Insurance: Banks Offering $1000 Coverage

Banks do not generally offer free life insurance to their customers, but life insurance is available to buy through most banks. Some banks offer $1,000 worth of accidental death and dismemberment coverage for free to customers, which is often used as a foot in the door to sell increased coverage. This is a dubious practice, as the chances of losing a hand or foot in the modern workplace are slim, and there aren't a lot of accidental death claims compared to conventional life insurance or health coverage.

Banks don't offer free life insurance, but you can buy it through them

Banks don't generally offer free life insurance to their customers. However, life insurance is available to buy through most banks. These include simple term life insurance, decreasing mortgage life insurance, and funeral plans, which can provide a lump sum of cash to pay for expenses and bills that require settling after someone dies. Some banks also include critical illness insurance and income protection cover in their product selections.

You will find that most banks' life insurance products are provided by a trusted third-party insurer, such as Scottish Widows or Legal & General. It is the life insurance company that will underwrite and administer the policy and ultimately be responsible for paying out any claims.

Banks rarely sell the best life insurance policies or offer the cheapest monthly payments. This is partly because their products don't appear on comparison sites, so they are not in direct competition with similar insurance products from other providers.

While researching life insurance products offered by many well-known high street banks, it was found that you could get a cheaper and better-quality version of the policy if you went directly to the life insurance company.

How to Buy the Best Life Insurance

Regardless of your reasons for buying life insurance, the quality and cost of the policy will matter hugely. On the face of it, it can seem as though all life insurance policies are equal, but there are differences in the terms and conditions, and it isn't always clear how this may or may not suit your personal circumstances.

Through extensive research and vast experience working within life insurance businesses, it can be concluded that it is best to buy life insurance through a specialist life insurance adviser. Often, your personal details, such as your past and current health, as well as what you do for a living or your hobbies, can change the terms and/or the price of a life insurance policy. Specialist life insurance advisers can pre-empt this and search the whole market for the life cover that best suits you and your budget.

Life insurance payouts are usually tax-free

Inheritance Tax

Iowa, Kentucky, Nebraska, New Jersey, Maryland, and Pennsylvania are the only states that currently enforce inheritance tax. This is a tax placed on the recipient of any inherited cash payouts, properties, and other assets.

Income Tax

Life insurance proceeds are typically not considered taxable income.

Generation-Skipping Tax

Similar to estate tax, generation-skipping tax is imposed on assets that skip a generation. This is only enforced when the amount exceeds a certain threshold.

Interest

If the policyholder elects to delay the benefit payout and the money is held by the life insurance company for a given period, the beneficiary may have to pay taxes on the interest generated during that period.

Estate Tax

If the policyholder names an estate rather than an individual as the beneficiary, the person or people inheriting the estate might have to pay estate taxes. This is also the case if the beneficiary isn't named in the policy and the life insurance benefits go into a taxable estate. The first $11.7 million is not taxed at a federal level – this is the threshold. Anything above this amount is subject to being taxed.

Banks do offer life insurance to key players

BOLI is used as a tax shelter and a way to fund employee benefits. The bank sets up the contract and makes payments into a specialised fund, which is then used to pay out employee benefits. All premiums and capital appreciation are tax-free for the bank, allowing them to fund benefits in a tax-efficient manner.

The policy remains in place even if the insured employee leaves or is terminated. In the event of the insured individual's death, tax-free benefits are paid out. This type of insurance is not available for individuals to purchase for themselves but is instead a product designed for banks and corporations to insure specific employees.

There are three types of BOLI insurance: general, hybrid, and separate. The general type is the most common and oldest, with the bank's investment deposit forming part of the carrier's general account. A separate account allows the insurance provider to manage investments separately, while a hybrid account combines aspects of both general and separate BOLI.

Life insurance can be used as a tax-shelter

Life insurance can be used as a tax shelter in several ways. Firstly, it can help individuals reduce their taxable estate by gifting money to their heirs, who can then use it to purchase a life insurance policy on the individual's life. This way, the individual's heirs can enjoy the gifted money during their lifetime, and the death benefit will be tax-free for them. Additionally, the individual's taxable estate is reduced by the amount of the gift.

Life insurance proceeds are generally not taxable, and this feature can be leveraged to offset future tax liabilities. For example, if an individual is expected to owe $100,000 in taxes upon their death, they can purchase a permanent life insurance policy with a $100,000 death benefit. This way, even if the individual dies early, the life insurance proceeds can cover the tax liability, and if they live longer, they can access the cash value of the policy tax-free.

Life insurance, especially whole life insurance, offers tax advantages that can help both the policyholder and their beneficiaries. Here are some ways in which life insurance can be a tax shelter:

• Income-tax-free death benefit: The death benefit paid out to heirs or beneficiaries is generally not subject to income tax. In contrast, retirement plan proceeds are typically taxed when received by beneficiaries.
• Tax-deferred cash value accumulation: Whole life insurance builds up cash value over time, and this growth is not subject to income tax. The cash value can be accessed tax-free, providing a valuable source of funds for the future.
• Tax-advantaged access to cash value: Money borrowed or withdrawn from the cash value of a life insurance policy is not taxed up to the amount paid into the policy through premiums. This allows policyholders to benefit from the tax-deferred growth of their cash value.

It's important to note that a specific type of life insurance called "bank-owned life insurance" (BOLI) is used by banks as a tax shelter for themselves. In this case, the bank is the policy beneficiary and owner, and the insurance is taken out on key employees whose death could cause a financial loss for the bank. The tax-free benefits are paid to the bank upon the insured individual's death. While BOLI is not available to individuals, it demonstrates how life insurance can be structured as a tax shelter.

Life insurance payouts depend on the type of policy

• Term life insurance provides coverage for a specific term, such as 10, 20, or 30 years. If the insured person passes away during the policy's lifespan, the beneficiaries will receive a payout, often called a death benefit. Term life insurance is generally more affordable than permanent life insurance but does not offer the same level of coverage for life.
• Whole life insurance is a type of permanent life insurance that combines a death benefit with a cash value account. The cash value component grows over time, and policyholders can borrow against it. However, if the borrowed amount is not repaid, the death benefit will be reduced. Whole life insurance is more expensive than term life insurance due to the additional cash value component.
• Universal life insurance is another form of permanent life insurance that offers a death benefit and a cash value account. Universal life insurance policies provide flexibility, allowing policyholders to change their death benefit or lower their premiums. The cash value account's earnings can also help pay the premiums.
• Variable universal life insurance is a type of universal life insurance that allows policyholders to invest their cash value account in stocks, bonds, or mutual funds. This option provides the potential for higher returns but also carries more risk.
• Indexed universal life insurance is another variation of universal life insurance that ties the cash value account's growth to a stock market index, such as the S&P 500. This option offers the potential for higher returns but may also come with additional risks.
• Bank-owned life insurance (BOLI) is a type of life insurance where the bank is the policy beneficiary and owner. This type of insurance is used as a tax shelter and to fund employee benefits. It is typically offered to high-earning employees or board members of a bank.

The payout process for life insurance policies may vary depending on the insurance company and the specific policy. It is important to carefully review the terms and conditions of your life insurance policy to understand the coverage, benefits, and payout options available to you and your beneficiaries.

Frequently asked questions