5 Ways Whole Life Insurance Provides Tax Advantages

September 16, 2022
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Life insurance is essential in providing for beneficiaries upon your death, but it can also offer other tax advantages you may not know. For this reason, whole life insurance, also called cash value life insurance, is often used as a vehicle to reduce your taxes while alive and for your estate and beneficiaries. Here are five ways whole life insurance provides tax advantages to you today and to your heirs in the future:

#1- Tax-free death benefit- The money you pay into a permanent life insurance policy grows tax-free and remains tax-free to your beneficiaries.

#2- Tax-free loan- The policy owner can take tax-free loans from the cash value of the life insurance policy for various reasons, such as retirement income or to pay for college for a child or grandchild. The loan doesn't need to be paid back but will reduce the death benefit beneficiaries receive. Using a cash value loan may result in interest charges and a reduced death benefit and may collapse the policy if not appropriately managed. Consult your insurance professional, so you fully understand life insurance policy loans before initiating a policy loan.

#3- Tax-free earnings- The tax-deferred growth inside a whole life insurance policy doesn't count as income for Social Security or Medicare taxes.

#4- Tax-deductible- If you own an organized business, life insurance premiums may be deductible if the policy is part of a business succession strategy. Consult your financial and tax professionals if this is your situation.

#5- Tax strategies- There are tax-advantaged strategies using life insurance that may be appropriate for your situation. Consult your financial, legal, and tax professionals before using life insurance as part of an estate or trust plan:

  • Life insurance to annuity 1035 exchange- The IRS lets you exchange your permanent life insurance policy's cash value for an annuity, a 1035 tax-free transfer of one contract for another. The exchange may generate more income, and an annuity can also guarantee payments for life, but the exchange will cancel the life insurance policy and death benefit.
  • Irrevocable life insurance trust (ILIT)- Using this strategy, you make a cash gift to the ILIT to purchase a permanent survivorship life insurance policy directly to exclude it from one's estate. The ILIT is the owner and beneficiary of the policy. When the survivor dies, your heirs will not have to pay estate and income taxes on the death benefits.

This article has highlighted one type of life insurance, whole life, but term life insurance or variable life insurance are other options that may be appropriate for your situation. Life insurance can play an essential role in protecting your family from financial hardship and estate planning and retirement planning by providing a tax-free source of income.

 

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any life insurance product. To determine which products(s) may be appropriate for you, consult your financial professional prior to purchasing.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by Fresh Finance.

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Sources:

https://www.investopedia.com/articles/pf/07/permanent_life_insurance_taxes.asp

https://www.kiplinger.com/personal-finance/insurance/life-insurance/602644/7-ways-to-utilize-life-insurance-cash-value

https://www.nerdwallet.com/article/insurance/tax-consequences-whole-life-insurance