Plan ahead to get more out of your life insurance benefits

Planning ahead for your family's financial security after you're gone can help ensure they'll have money for expenses such as mortgages and college tuition. But there are times when planning ahead can also benefit Uncle Sam.

Starting a life insurance policy is one way many Americans plan ahead for their family's future, and according to the Wall Street Journal's SmartMoney.com, generally, if the beneficiary named on the policy is your spouse, the money will pass on without the government collecting any taxes.

It's a little different story if the beneficiary is anyone other than your spouse - say your children or even your grandchildren. If the insurance is in your name, it could be attached to your estate, which then could be taxed as it is passed on to anyone other than your spouse.

One way to continue having term or permanent life insurance and to reap more benefits is to set up an irrevocable life insurance trust, according to the National Association of Insurance and Financial Advisers. When you set up a trust, the trust actually owns the policy, and therefore, when you die, it won't be part of your estate. You can name beneficiaries, set up how payments will be made and even if the beneficiary dies prematurely, how the remaining funds in the trust are distributed.

As you review low cost life insurance options, you may want to discuss with an insurance agent and tax attorney how you'd like estate taxes and insurance benefits to be handled. Estate taxes aren't cheap, and paying them could possibly mean the difference of your child or grandchild being able to afford full college tuition.

As you plan ahead for your family's security, keep in mind that you need to plan beyond just setting up funds to pass on after your death. As you collect life insurance quotes or plan other retirement and financial security options, it may be in your best interest to ask questions regarding how to maximize your money eventually going to your beneficiaries.