Tax Advantages of a Permanent Life Insurance Policy
Most of us know 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 options.
Permanent life insurance, including whole 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 renew a term policy. Because of the permanent nature of this type of insurance, you also have the added benefit of accumulated cash value. The policyholder can use that cash value through loans and other withdrawal options and can be an important addition to your retirement planning.
Several unique tax advantages of permanent life insurance are not found with other financial tools.
o Cash value accumulates free of taxation. You will not be required to pay income tax on interest or other earnings credited to cash value.
o Borrowing the cash value may be done without paying 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 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 can reduce the policy’s overall value. And lastly, if the policy is a modified endowment contract, the loan may be taxable upon issuance.
o Your beneficiaries receive the death benefit free of income taxation. This tax advantage is true of both term and permanent policies.
o By 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. Remember, 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 and the traditional death benefit enjoyed by all life insurance policies. Consult your insurance agent, Brian Gruss, and attorney to discuss the advantages of this financial product so that you and your loved ones may reap all its benefits.
