Have you ever wondered how you can get life insurance for free? I'm not talking about getting free life insurance from work. The life insurance amount usually isn't enough. I'm talking about how to get free life insurance outside of work.
My wife and I have life insurance because with have two young children, a complicated net worth, and mortgage debt. Having life insurance will buy time for our survivors to sort everything out after one or both of us passes.
Because we have more assets than liabilities, we could technically self insure (not have insurance). However, the value of our life insurance insurance policies is actually worth much more than the stated death benefit.
Renewing our life insurance policies and creating death files have reduced our stress as parents. Please get on them if you haven't done so already.
If you're still dragging your feet, let me go through a thought process on how to get life insurance for free. The thought process might make you hate income taxes less. Further, it might also motivate you to make more money to better take care of your family.
Life Insurance Benefits Are Usually Not Taxable
To first understand how to get life insurance for free you must first understand the tax liability of a death benefit. Life insurance proceeds are not taxable with respect to income tax. So long as the proceeds are paid out entirely as a one-time, lump-sum payment, no taxes are owed.
You could also decide for your beneficiaries to receive life insurance payments in a series of installments. In such a scenario, the insurer will typically pay interest on the balance outstanding. This would mean the beneficiary would have to pay income tax on the interest.
But in the vast majority of cases, life insurance proceeds are paid in one lump sum. Therefore, your beneficiaries should have no interest on which to pay income tax.
The higher your marginal income tax rate, the more valuable your life insurance policy is. In other words, the more money you make, the higher the probability you are getting life insurance for free.
To get free real life insurance quotes all in one place, check out PolicyGenius. Both my wife and I used PolicyGenius to get affordable 20-year term life insurance policies in 2021. This way, we are covered until our children become adults.
Estate Tax Considerations For Life Insurance
Estate taxes are a different type of tax liability to consider. When you pass away, the executor of your estate will have to file IRS Form 712 as part of your estate tax return. Form 712 states the value of your life insurance policies based upon when you died.
If your spouse is your beneficiary, the life insurance payout is not taxed. It will be passed on to them fully, along with the rest of your estate that was left to them. Spouses typically have an unlimited exemption with regard to estate taxes.
If your beneficiary is anyone besides your spouse, such as a child or parent, your life insurance payout will typically be added to the value of your estate.
So long as the total value of your estate is less than the federal and state tax exemptions, your estate won't have to pay any taxes. However, any amount over the exemption will be subject to estate and inheritance taxes.
Please establish a revocable living trust to protect your privacy and save on probate court. Your heirs and estate will thank you!
Latest Estate Tax Threshold
- Federal Estate Taxes – The value of your estate that exceeds $12.92 million per individual will be subject to a 40% estate tax rate in 2023.
- State Estate & Inheritance Taxes – There are 18 states, plus D.C., with an inheritance or estate tax. The estate tax exemption amount varies by state, but typically ranges from $1 million to $2 million. Tax rates can be as high as 20% depending upon where you live.
In other words, so long as your estate is worth less than the estate tax threshold in the year you die, you won't have to pay estate taxes. However, beware of your state's estate and inheritance tax policies.
How Life Insurance Gets More Valuable
Always calculate how much in gross income you need to earn to pay for that something. As soon as you start thinking this way, you will be more judicious with your spending habits.
When it comes to determining the amount of life insurance coverage, you should think similarly. How much do you need to earn before taxes in order to pay out the death benefit amount?
Let's say you get a 30-year, $1 million term policy for $50 a month when you are 30 years old. 30 years at 30 years old is the ideal age and duration for a life insurance policy in my opinion. Your estate is also well below the estate tax threshold.
Here is the value of your $1 million term life insurance policy based on your effective tax rate.
- If you pay a 0% effective tax rate, then the value of your $1 million life insurance policy is $1 million.
- If you pay a 10% effective tax rate, then the value of your $1 million life insurance policy is $1.111 million.
- If you pay a 12% effective tax rate, then the value of your $1 million life insurance policy is $1.136 million.
- If you pay a 15% effective tax rate, then the value of your $1 million life insurance policy is $1.176 million.
- If you pay an 18% effective tax rate, then the value of your $1 million life insurance policy is $1.219 million.
- If you pay a 20% effective tax rate, then the value of your $1 million life insurance policy is $1.250 million.
- If you pay a 23% effective tax rate, then the value of your $1 million life insurance policy is $1.298 million.
- If you pay a 25% effective tax rate, then the value of your $1 million life insurance policy is $1.333 million.
- If you pay a 28% effective tax rate, then the value of your $1 million life insurance policy is $1.389 million.
- If you pay a 30% effective tax rate, then marginal income taxes, then the value of your $1 million life insurance policy is $1.428 million.
- If you pay a 35% effective tax rate, then the value of your $1 million life insurance policy is $1.538 million.
- If you pay a 40% effective tax rate, then the value of your $1 million life insurance policy is $1.666 million.
- If you pay a 45% effective tax rate, then the value of your $1 million life insurance policy is $1.818 million.
- If you pay a 50% effective tax rate, then the value of your $1 million life insurance policy is $2.000 million.
In other words, if you pay a 30% effective tax rate, you would need to earn $1.428 million to net $1 million to give to your beneficiaries. Therefore, life insurance gets more valuable the higher your income.
How To Get Life Insurance For Free
The value of a life insurance benefit increases the higher our effective tax rate. Now let's calculate how to get life insurance for free. Your goal is to get free life insurance and live beyond the life insurance coverage period.
Take the difference between the gross income you must make to pay out the death benefit and the death benefit amount. Now compare the difference with the premiums you pay for your life insurance policy.
For example, let's say you pay a 20% effective tax rate and have a $1 million term policy. To pay out a $1 million death benefit if you didn't have insurance means you need to make $1.25 million. Take $1.25 million gross income minus $1 million death benefit = $250,000. $250,000 is the amount of taxes you had to pay.
Now take $250,000 in taxes you paid and subtract it from the amount of life insurance premiums you would pay for the life of the policy. If the difference is greater than 0, then you were able to get life insurance for free.
If you get a 30-year, $1 million term policy at age 30, you will likely pay between $500 – $1,000 a year, depending on your health. Once you multiply $500 – $1,000 by 30, the life of the term policy, you get $15,000 – $30,000. You can do the same math with a shorter term policy as well.
$15,000 – $30,000 is clearly less than $250,000 in taxes. Therefore, the cost of having a life insurance policy is free if you die within the term. In fact, you end up making money equivalent to the death benefit minus the premiums paid. But we already know this.
Of course, if you manage to live past your life insurance term, as most people do, then you lose $15,000 – $30,000 from life insurance premiums. But that's not a big price to pay to help protect your family for 30 years. It's a fantastic deal, especially because you get to live!
HENRYs Are The Target Demographic To Have Life Insurance
HENRY stands for “High Earner, Not Yet Rich.” A typical HENRY might earn a top one percent income for their age of $200,000 – $800,000. However, they might feel a lot of low-level anxiety because their net worth isn't large enough yet.
Although HENRYs are making a good amount of income, they are often working long hours and constantly stressed out. By the time HENRYs reach 40, they might start questioning the purpose of grinding so much. Paying a high tax rate while exhausted daily is no fun.
With potentially young children and older parents to care for, HENRYs are in the sweet spot for getting life insurance. Most HENRYs I know pay at least a total 20% effective tax rate. Many also work in expensive cities with heavy tax burdens.
Therefore, the value of their life insurance policy is usually at least 20% greater than the death benefit. This means the life insurance policy will end up free if they die before the term is over. As a result, it would be foolish not to have at least some life insurance at this stage.
Between the ages of 30 – 60 is when life is most complicated, and potentially most risky. Normally, we can't draw from our 401(k)s and IRAs before age 59.5. Further, the earliest you can take Social Security is 62. Having a valuable life insurance policy to support you through your more demanding years is a smart move.
Does A High Income And Rich Person Still Need Coverage?
Let's say you do have a top one percent net worth of at least $11 million. Further, your asset-to-liability ratio is at least 10:1. You're also earning a top income. Do you still need life insurance?
Probably not. If your estate is producing enough passive income to cover your family's living expenses, it can usually continue, untouched. Worst case, the executor of your trust can sell an asset to cover your estate's liabilities.
Even though you have a high income and a high net worth, life insurance is still nice to have. First, you're getting better value for the life insurance death benefit you're paying. Paying a high marginal income tax bracket is the reason. But most importantly, you have an additional financial buffer which will pay for survivors time to grieve.
We sometimes make rash decisions during emotional times. And the grieving process might take months, if not years to complete. A life insurance benefit may help keep things steady during this time.
Coverage Is Worth It For My Family
To me, life insurance is worth at least 1.5X its actual death benefit. In other words, a $1 million term policy is really worth $1.5 million to my family or more. Therefore, I plan to keep owning life insurance until my kids graduate from college. By then, my mortgages will certainly be paid off as well.
Life insurance minimizes disruptions in an already disrupted life. If you're looking for competitive life insurance quotes all in one place, check out PolicyGenius. My wife was recently able to double her life insurance policy for less with PolicyGenius. And together, we feel more relief because we now have the same amount of coverage.
Readers, did you realize life insurance is more valuable the more you make? What are some holes in my logic in getting free life insurance based on tax rates? What do you think of the HENRYs being the target demographic to get life insurance? Join 50,000 others and sign up for my free weekly newsletter.
If you aren’t rich when you get a term life policy, but then become rich during the term (say 15 yrs into a 30 yr policy), would it make sense to stop paying for insurance (because you no longer need it) or just keep paying because at that point the ongoing premiums are more of a nuisance than a burden. i.e., it’s like a lotto ticket that you win if one dies?
Fixed payment policies are great because the money you pay over time in real terms gets smaller due to inflation (kinda like mortgage pmts).
Good question! At that point, I would just keep on paying as an auto payment deductible b/c the cost will seem so small thanks to inflation.
Then again, the death benefit will also be smaller in real terms due to inflation.
It’s really up to you. I hope you have this problem in 15 years! I will probably just keep it until
The term expires.
Should people be afraid that their spouse/beneficiary may be incentivized to kill them if they have a life insurance?
This is a serious question.
I heard many “husband killed wives for life insurance money” stories.
Maybe! Have you experienced this yourself? If so, how were you able to calm her down to find peace and harmony?
For many people I know, life insurance is a small percentage of one’s overall net worth. So getting a divorce or some thing else is a better strategy with lower risk.
This argument only holds water if the payment to be made to a beneficiary is from earnings at the same time as the death benefit. In actuality, money saved over time will grow due to the time value of money. This will partly offset the taxes.
Serious question in good faith, here. If you’re describing term life insurance rather than whole life, which you seem to in your examples, and by asserting that you will let it go once your kids are done with college, then doesn’t your argument that it’s “free” only apply if it’s paid out? In other words, only in the unlikely scenario that you don’t outlive your policy? Let’s say there’s an 80% chance that you outlive your 30-year policy. 80% of the time you lose what you paid in premiums with no benefit whatsoever, and 20% of the time your beneficiaries get the payout of $1MM, with a value of $1.5MM, according to your rationale. Therefore your expected value is something closer to (.2 * $1.5MM value) – total premiums paid. And if we assumed there were only a 10% chance that you’d not outlive your policy, your benefit analysis is off by precisely one order of magnitude, and that changes the proposition quite a bit. Granted, you may still end up ahead if you get a cheap $1M, 30-year term policy at 30 years old for $50/mo, but maybe not if you wait until you’re 50 to buy that policy, and you’re not in ideal health, etc.
Correct. If it’s paid out, the policy was free.If it doesn’t pay out, you are happy it didn’t and glad to have paid for a policy that would have been free.
Thanks for the unique perspective! I never thought of life insurance as being “free”. But with this way of thinking, it makes paying for any premium much mentally easier.
No problem! And yes it does. Half the battle with money is getting our money mindset right.
My wife and I each have $1M policies. It’s a pain paying the premium each year but comforting to know our kids will be taken care of. We’re debt free and if by chance something should happen, they’d be taken care of.
The peace of mind for a parent is intrinsically worth way more than the premiums. But to think about life insurance premiums in the way I’ve telegraphed in this article should help lower the burden of paying them!
Getting life insurance was one of the biggest weights off of my shoulders when I became a parent. It is so hard raising kids sometimes and I pray my kids my wife and I will both be alive and thriving long past our kids reaching adulthood. But if god forbid something were to happen, knowing that our life insurance will be there to help support them is so huge.
I’ve never thought about thinking about getting life insurance free per say, but I like how you think Sam. You’re always one to look at positives and think outside the box! I haven’t come across any other personal finance writers who write like you do.
Yes, being a parent can be so difficult sometimes. And the pandemic really reminded us almost every day of our mortality. It where is a new mentally, and when I got an affordable 20-year policy at the end of 2021, I felt so much relief!
It was like, at last, I can almost die in peace. But not quite, because I still had to finish editing my book for July 19, 2022 release date. So now, I can feel better dying in peace. But not yet! Because I want to live long enough to see my children fine their own life partners.
Hi Sam,
Great article and value here. You can also add a ROP (Return Of Premium) rider on your term life insurance and have all premiums refunded at the end of term.
Will look into this! Thanks for the suggestion.
I started off with only employer sponsored life insurance. It wasn’t much, but it got me through my early to mid 20s. Then I got my own policy to supplement in my late 20s. I decided to up my payout and change carriers in my 40s as my dependents and income grew.
I have never done a value calc on my death benefit before. Hadn’t thought of it like that. But I certainly would like to live a very long happy healthy life and outlive my term policy. Time is going too fast these days.
Really unique way of thinking about things. That is actually pretty awesome. We all want to outlive our life insurance policies. But we all want to pay the least amount of premiums as possible.
By framing it so that the value of the death benefit is greater than the actual payout Makes paying the premiums much less painful. Thanks!