Looking for an Income and Estate Tax Advantage? Think Life Insurance

Life Insurance

For centuries, life insurance has been the glue that has kept families in their homes with food on their table. It has protected assets and preserved estates. If you are looking for a general sense of the ways in which life insurance can provide these benefits for you and your family, please take a moment to review the items below.

The following points are general rules, and are obviously subject to limitations and exceptions. Under current tax law, cash value life insurance policies have several tax advantages for accumulating money. Cash value insurance is said to provide "double-duty" dollars or benefits, because money can be made available for the future whether the insured dies or lives. The internal buildup of cash value is tax deferred. Money can be taken from the policy in the form of loans or withdrawals that are “normally” or usually not taxable. The policy can provide tax-free income if the policy continues in force until the death of the insured. If the policy pays dividends, which would be the case with most mutual or fraternal life insurance companies, they can be withdrawn tax-free until the cost basis (the amount paid in) is recovered from the policy.

-Life insurance can offer a number of income and estate tax advantages:

-There is normally no income tax payable on death proceeds.

-Cash value policies will generally allow for tax-deferred internal buildup of cash value as long as the policy remains in force.

-An individual can retrieve his/her investment in the policy (premiums paid) before recognizing gains.

-Dividends paid out to the policy owner are generally not subject to federal income taxation until the total dividends paid exceed the total premiums paid into the policy.

-Policy loans are normally not considered income. If exercised correctly, a combination of withdrawals and policy loans can produce tax-free income from a permanent life insurance policy while the insured is still living.

-There is no estate taxation on the death proceeds if the insured had no incidents of ownership in the policy and the beneficiary is not the insured's estate, executor, or administrator, or there is no obligation to pay estate expenses with life insurance proceeds.

With all these benefits available with a permanent cash value life insurance policy, wouldn’t it be wise to make sure your term life insurance is convertible and purchased through a carrier that can offer you the potential for obtaining them. 

About the author: Kyle McDonald holds FIC, FICF, FSCP® & CLTC designations. His viewpoint on life insurance is simple, “Anyone with a family must have life insurance. In the end, life insurance is for others you care about, not you.” He is ready to help you and your family get the best option available. Contact Kyle today at   1-800-651-1953 or KMcDonald@Pivot.com.