Burial Insurance and Taxes

Burial Insurance and Taxes

Burial insurance is a kind of whole life insurance that only pays for end-of-life expenses like funerals, cremations, burial vaults, and so on.  Taking out a policy can make sure your death won’t be a financial burden on your family, and since there’s no medical exam involved it’s easy to get no matter what age you’re at or what illnesses you’re fighting.  So how does this form of insurance interact with the national and local tax system?

Funeral Costs And Deductions

The simple answer is that no, burial insurance claims aren’t tax deductible.  While you can typically deduct medical expenses, funeral expenses are usually paid by the next of kin.  As such, you can’t deduct the cost of your premiums and your beneficiary doesn’t get to deduct the funeral costs.

However, in some areas, you can deduct the cost of a funeral if the money for it comes out of the deceased person’s estate.  Life insurance normally bypasses the estate (to protect the policy from creditors), but you can name your estate as your beneficiary.  This lets your estate pay for the funeral costs and get a full reimbursement, but this reimbursement can disqualify the estate from getting a tax deduction.

Estates And Deductions

While you can use your estate as a way to deduct funeral costs, odds are good that you won’t need to.  Estates worth less than $5 million don’t pay taxes when they transfer to the next of kin, and if that’s the case you won’t have any taxes to deduct.  On the other hand, having your estate pay the funeral costs is a great idea if your net value is above the taxable number.  Keep in mind though that tax laws change every year, so be sure to stay on top of any changes that might affect your estate.

Specific Deductions

For the most part, the funeral and end-of-life expenses you can deduct from an estate are the same expenses covered by burial insurance.  For example, these can include:

  • - Cremations

  • - Caskets

  • - Burial plots or vaults

  • - Headstones and plaques

  • - Funeral home services

  • - Church services

  • - Hearse rentals and burial services

The list continues from there.  When filing national taxes, your executor should report these expenses on Form 706 Schedule J.  This attachment will have the entries needed to itemize funeral expenses paid by an estate.  However, keep in mind that reimbursements by burial insurance, funeral insurance, Social Security, veterans’ benefits, and other sources can disqualify your estate from receiving tax deductions.

If your estate is worth a lot of money, you may want to skip the burial insurance and have your estate pay the money out of pocket to give it a tax break.  On the other hand, if your estate is worth less than the taxable $5 million or more, then burial insurance can be a great idea.  It will help your family cope with the costs of a funeral, which usually cost several thousand dollars even for a small service.  So help your family deal with this sudden expense by asking insurers about burial insurance.

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