Originally Posted On: https://www.iquanti.com/
The tax benefits of life insurance are often overlooked when the tax season arrives. While life insurance is designed to protect your loved ones when you pass away, it also has some tax consequences depending on the exact policy you choose. In this guide, we’ll go over what life insurance is and the three primary advantages associated with different types of life insurance.
What Is Life Insurance?
Life insurance is a contract between an insurance company and a policy owner. By purchasing one of these policies, you’re guaranteed a specific sum of money that will be paid out to your beneficiaries when you die. In exchange, you’ll need to pay a monthly premium while the policy is ongoing.
When applying for life insurance, you’ll need to include your current and past health issues and any high-risk activities you perform. This information determines what your premium will be.
Three Life Insurance Tax Benefits
There are three distinct benefits available to people who get a life insurance policy, which include the total cash value being tax-deferred and tax-free benefits.
Total Cash Value Is Tax-deferred
Permanent life insurance policies build up value over time while you pay monthly premiums. If you select a whole life policy, the cash value will increase at a rate that’s guaranteed by your insurance provider.
This interest rate doesn’t change according to market conditions. Any growth in your cash value account is tax-deferred, which means that the IRS won’t immediately tax your account as it increases in value.
Income Taxes Aren’t Required for Death Benefits
Your beneficiaries will be able to receive death benefits from the insurance policy without needing to pay any taxes. In comparison, most of the proceeds from a retirement plan are taxed when beneficiaries receive the funds.
Cash Value Can Be Accessed as a Tax-advantaged Solution
The money that’s taken or borrowed from the cash value of your life insurance policy won’t be taxed by as much as the “cost basis” for the policy, which means the amount you put into the policy via premiums won’t be taxed.
How to access your policy’s cash value
There are two methods you can use to access your policy’s cash value.
Withdraw
Let’s say that the cost basis of your policy is $100,000. You could withdraw $100,000 from your policy without paying income taxes on the proceeds.
Borrow
You can also borrow against your cash value whenever you need to, which won’t be taxed as income on your return. Even if the amount your borrow exceeds your cost basis, the funds won’t be taxed.
It’s important to note that some policies include a penalty tax when you take out distributions and loans. Consider speaking with a tax professional before buying life insurance.
Bottom Line
With the right life insurance policy, you and your beneficiaries can take advantage of several tax benefits. Along with your cash value funds being tax-deferred, no income taxes need to be paid by beneficiaries who receive death benefits.
