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Beware these common traps made with life insurance that can reduce its value to your family ... or leave you paying a bundle to the IRS.

Trap: Owning life too much, too long. During the years you are working and raising a family, you need a substantial amount of life insurance to protect your family from the possible loss of income.

But as a senior-year approach - with your children grown, the mortgage paid and retirement accounts funded - your insurance needs can be reduced drastically.

For many, the justification for the purchase of life insurance is the financing of real estate taxes. But this need has been demonstrated by recent tax law changes, which the real estate and gift tax exemption for individuals to $ 1 million.

By paying for unneeded insurance protection until you the opportunity to acquire higher yield investments.

STRATEGY

Check your insurance in light of changes in your personal circumstances and your estate tax exposure. If you find that too much insurance, consider ..

* Swapping your life for a tax-deferred annuity issued by an insurance company to increase yield. This may be through a tax-free exchange, which allows you to any taxable income from the sale of insurance.

* Donate your insurance for charitable purposes. You will receive a tax deduction for the cost of the policy in general, the amount of the premiums you pay it.

* Making a gift of the policy to your child or grandchild. The policy will benefit tax-free to the recipient, so that the child a valuable head start on financial security. The gift also will be the policy from the taxable estate, assuming you survive three years after the gift.

You can avoid gift tax on the transfer by the use of annual gift tax exclusion (currently $ 10,000 per recipient, or $ 20,000 if the gift, by a married couple) and, if necessary, a portion of the property and gift tax exemption amount.

* Cashing in politics. This is money in your pocket, but you will recognize taxable income to the extent that the amount of the policy beyond what you pay through premiums.

Inheritance: If you find you still need some life insurance to cover potential estate taxes, you should use a second-to-policy, which both you and your spouse and pays its benefit on the death of the survivors.

The estate tax marital deduction, all from one spouse's assets pass estate tax free to the surviving spouse, it is after the death of the surviving spouse, that a couple of the tax due.

A second-to-the policy can provide for the financing of such an inheritance tax bill at significantly less cost than buying two of the insurance for each spouse separately.

TRAPS

* The property insurance on your own life. This may mean that insurance proceeds be subject to inheritance tax at rates of up to 55%, because if you're the owner of a policy on your own life, the earnings are taxable in your estate.

Avoid this trap by their own receiver, or by the creation of a life insurance trust to keep the policy and the distribution of proceeds according to your instructions.

You can still finance the premiums on the policy by providing gifts to the policy owner (beneficiary or trust), with the annual gift tax exclusion to protect the gifts from tax.

Advantage: With the insurance on your life is owned by the beneficiaries, the insurance proceeds are income and estate tax free.

Related to avoid errors ...

* The property insurance on your own life and name the spouse as beneficiary. The insurance proceeds will escape estate tax on your death due to the unlimited marital deduction - but if this is your spouse owning the proceeds, they will be taxable in his / her estate.

* Owning insurance on one person's life and naming a third person as beneficiary.

Example: A spouse owns insurance on the other spouse's life and name a child as beneficiary.

The trap here is that because the policy owner controls the name of the recipient, the payment of benefits to the recipient as a taxable gift by the policy owner.

Again, this case should be avoided by the receiver itself, the life insurance, life insurance or a trust own the policy.

Important: If you have a life insurance trust to own insurance, make sure the trust is provided by a specialist in the region. Trust documents can contain irre nonspecialists bad language, which do not meet the technical requirements so that the trust to fail.

* Borrowmg against life insurance. It is tempting to borrow against life insurance policies, because policy loans can be a tax-free source of money and with a low interest rate.

But a few cases may result from borrowing against insurance ...

* When you borrow against insurance you reduce the insurance benefit for which you presumably bought the insurance, leaving your family more exposed to financial risk.

Dangerous Scenario: As a general rule, interest on a loan against the insurance is not paid in cash, but is against the policy. If the loan is not repaid, and interest, in comparison to loans may grow until it is equal to the policy value. Then the policy to terminate, and you will recognize taxable income in the amount of non-loan (a "forgiven debt") minus the basis in policy, even if you are non-cash expenses, which will pay the tax .

* If you borrow against insurance and then transfer the policy to another person, the policy benefit may become subject to income tax

Why: If a policy which will be borrowed against by the gift, the recipient is as bought the policy through the acquisition of the outstanding loan obligation with the amount of the loan assumed that the purchase price.

And under the Tax Code, if an existing life insurance policy is purchased, the benefit to be taxable income to the buyer if the purchase price on the basis of the donor in politics.

Example: A parent has a $ 500,000 insurance policy on his / her own life that has a cash value of $ 100,000. He has a cost basis of $ 60,000 in politics. He borrows $ 90,000 from the policy to reduce the cash value to $ 10,000, then a gift of public policy on a child.

The result is that the child is deemed to have purchased, by the assumption that the $ 90,000 loan obligation. Therefore $ 410,000 of the policy benefit will be taxable income for the child, if paid, rather than tax-free.

Bottom line: Loans cause problems, so it is best not to take loans against life insurance.

If you have already made loans against life insurance, check with an expert for unexpected problems they may cause.

Danfield Carson is a "" Under the Radar "Internet Entrepreneur, breastfeeding sale of various products for the last 8 years. Although you've probably never heard of him. There's a good chance you've visited his websites in the past and even purchased some of its products.

Want to learn more about Life Insurance Traps? Be sure to see what Carson Danfield reveals at Life Insurance Traps