Tax-Advantages

Avoiding Taxes on Gains

When taxes are due in April each year, it’s a good time to consider the tax advantages of life insurance.  It is widely known that cash value inside a life insurance policy grows tax-free, and the death benefit of a life insurance policy can be tax-free to the beneficiary.  However, life insurance products offer more nuanced tax advantages that can be beneficial.

For permanent life insurance, cash value can accrue inside the policy using an interest rate that is calculated at the discretion of the insurance carrier.  The purpose of the cash value is to keep the policy inforce.  With most permanent life insurance products, if the cash value is depleted, the life insurance policy is terminated.  Since the purpose of life insurance is to provide a death benefit, the cash value accumulates tax-free, and the policy owner does not pay any taxes on the gains for the duration of the policy.  If the policy is surrendered, the gains (anything over the basis of the premiums paid) of the surrender value is taxed as regular income, based on the policy owner’s tax rate.

The policy owner is free to use the cash value of the policy as a living benefit.  Withdrawals and loans can be taken for the duration of the policy, as long as the distributions do not deplete the cash value to a point where the policy is unsustainable.  These distributions are not taxed, but loan interest will be assessed, and the death benefit amount will decrease comparably.  We work with insurance carriers that offer low interest rates on policy loans, including a carrier that has a crediting rate that makes the net loan interest rate 0.25%.  The distributions can be used for any purpose the policy owner wishes; most often, this is a retirement income strategy.

Using life insurance for its tax advantages can be a wise addition to a financial portfolio.  Contact us with any questions or opportunities to help you or your clients achieve identified goals.  This is what we enjoy doing for only a select number of families, businesses, and charitable institutions each year, and we look forward to hearing from you.