Ensuring that a family can financially survive the death of its bread winner has been the principal purpose of life insurance. Over the years, it has developed many tax-saving attributes that increases its usefulness as a store of value-for retirees too. See which tax benefit you can use.
As a tax shelter, life insurance can save on income taxes for you or your beneficiaries. It can also bypass estate taxes (with proper estate planning) while you supply wealth to your loved ones.
First off, life insurance comes in two fundamental flavours- permanent and term. Both offer a death benefit to a designated beneficiary upon the death of the insured. But only permanent life insurance builds a store of value translatable into cash. Permanent life insurance includes whole life, universal life and variable life-- the latter two maintaining their store of value in market investments.
Death Benefit Tax Advantage
Producing a legacy through life insurance is principally done through the death benefit payout. And there is no limit to the size of the death benefit you can create. The tax benefit is that your beneficiary receives it free of income tax. Transferring other tax-advantaged investment ultimately requires you or your beneficiaries to pay tax on its earnings. See table summary.
If you have wealth you wish to share while you are living, you can gift money to your loved ones and request they take some of it to buy an insurance policy on you. That way they can enjoy some of your wealth now and more when you pass.
Permanent Life Insurance’s Store of Wealth Tax Advantage
Unlike other tax-advantaged opportunities, there is no limit on the store of wealth you can have in your life insurance–through growth or contributions. When you have maxed out contributing to other tax-advantaged opportunities, you can add to your life insurance savings.
Like other tax-advantaged opportunities, your life insurance cash value grows tax-deferred. One benefit of life insurance savings is that its earnings will not affect your social security taxation (per current tax law). Interest and dividends, as well as tax-free interest on bonds, can drive up your social security taxation if your income is high enough.
If your life insurance value is spread between market accounts, you do not incur taxation be rebalancing these accounts if they are within the same policy.
While you’re living you have access to the store of value of your life insurance policy. If your policy permits, you can take a tax-free loan of its value. However, under taxing conditions, you can access it by surrendering your policy or making a settlement. This is bit a brief highlight of the major life insurance tax advantages.