When tax season comes around, most people probably don’t think about their life insurance policies. It’s time they should.
The main reason to have life insurance is, of course, to help protect your loved ones if you die. But life insurance, especially whole life insurance, can also help you and your beneficiaries deal with some tax issues.
Whole life insurance and other permanent policies have the following benefits:
Death Benefits are Tax-Free
Term life insurance is applicable in this policy. Your beneficiaries will appreciate this. Avoiding a tax bite on life insurance payouts can be crucial. Beneficiaries are taxed most retirement plan proceeds.
In some cases, federal and state estate taxes can apply to life insurance payouts. If your life insurance is part of a large estate, consult a financial pro.
The Total Cash Value Grows Tax-Free Over Time
As you pay premiums, the cash value of your permanent life insurance grows over time. In the case of whole life insurance, the cash value grows at a guaranteed rate that is unaffected by market fluctuations. Other types of permanent insurance provide a variety of investment options.
The increase in cash value is tax-deferred, which means that the money grows without being taxed by the IRS. And it can grow into a significant savings account for your future.
The Cash Value of the Policy Can be Accessed on a Tax-Advantaged Basis
Up to the “cost basis,” or the amount paid into the policy through premiums, money borrowed or taken from the cash value of a life insurance policy is tax-free.
But be cautious. When taking loans and distributions, a certain class of policies receive less favorable tax treatment than described above and may be subject to a penalty tax.
In addition, using a life insurance policy’s cash value reduces its value and death benefit and increases the likelihood that the policy will lapse. It’s also taxable if a policy lapses with an outstanding loan in excess of the cost basis.
Again, if you are considering taking a distribution, you should consult with a financial professional about your specific situation.
Aside from these three benefits, there is another factor to consider. Retirement rules and distribution requirements are currently in flux. Many people want to build a portfolio of financial assets that provide various types of income tax benefits. Life insurance can help with that strategy. Read here to understand how you can diversity taxes with the help of a whole life insurance.
Get More Information on Tax Benefits You Are Missing
The best way to learn which tax laws can benefit you most is to sit down with an expert and create a custom plan to build your wealth and minimize your tax obligations. If you would like more information, contact us today.
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