Most of us are aware of the
benefits of obtaining a life insurance policy – the death benefit. The death benefit protects your family from
the financial hardship that may arise after your death. But there is a second benefit of life
insurance. Permanent or cash value life
insurance can offer unique tax advantages that cannot be found through other
Permanent life insurance,
including whole life and universal life, provides long-term life insurance for
the policyholder. Most policies feature
a level premium over the life of the policy.
You will always know your premium amount so you will not be surprised by
increases, as you might be if you renewed a term policy. Because of the permanent nature of this type
of insurance, you also have the added benefit of accumulated cash value. That cash value can be used by the
policyholder through loans and other withdrawal options, and can be an
important addition to your retirement planning.
There are several unique tax advantages of permanent
life insurance that are not found with other financial tools.
value accumulates free of taxation. You
will not be required to pay income tax on interest or other earnings that are
credited to cash value.
the cash value may be done without having to pay income tax. Loans are generally treated as debts and are
not subject to income tax. In addition,
these loans may not need to be repaid.
If you build up a large amount of cash value and maintain a minimum
death benefit to cash value ratio, you can borrow against the cash value for
systematic payments that can supplement your retirement income. Be aware, however, that the cash value may
be subject to income taxes when there is a withdrawal from or surrender of the
policy, or if the cash value to death benefit ratio is not maintained. Also, loans accrue interest and they can
reduce the overall value of the policy.
And lastly, if the policy is a modified endowment contract, the loan may
be taxable upon issuance.
beneficiaries receive the death benefit free of income taxation. This tax advantage is true of both term and
arranging the beneficiary designations in accordance with current laws, you can
avoid potential estate taxes and probate costs. By placing ownership and naming beneficiaries outside your
estate, you may be able to avoid the proceeds of the policy going into your
estate and thus being subject to estate taxes.
Keep in mind, however, that to avoid estate inclusion for existing
policies, you must transfer the policy at least three years before your death.
Permanent life insurance policies offer unique tax
advantages, as well as the traditional death benefit enjoyed by all life
insurance policies. Consult your insurance
agent and attorney to discuss the advantages of this financial product so that
you and your loved ones may reap all the benefits it has to offer.