Tax Advantages of Permanent Life Insurance
Tax implications are important details to consider when deciding where you will devote your money for the future. There are so many instances where people enter into retirement investments thinking that amount will be available just to find out a large portion will be inevitably dedicated to a tax bill. We here at Ringo Financial understand that each dollar is important which is why we would like to discuss the many substantial tax advantages associated with life insurance products.
One big tax advantage to using life insurance products is the proceeds of a death benefit are excluded from federal income tax. The proceeds are customarily received in one lump-sum, tax free, minus any policy loans and interest associated with those loans.
The next advantage would be the tax deferred cash value growth. When the premium payments exceed the policy’s expenses and insurance costs, the cash value continues to accumulate along with the interest that is credited to the policy’s cash value each year. Life insurance is one of few products that accumulates cash and gives the option to defer the taxes of the cash value and structure distributions of those funds tax free. There are advantages in other retirement and savings plans that have tax deferred growth as well.
Policy loans have the possibility to be accessed tax free. This can be accomplished as long as the life insurance policy is not classified as a Modified Endowment Contract(which happens when a life insurance policy becomes overfunded), according to the Internal Revenue Code (IRC). If the policy is not classified as such, withdrawals are not subject to tax until the cash value withdrawn exceeds the policy’s premium basis. Future withdrawals are subject to taxation once a policy’s basis has been withdrawn. Additional conditions apply to taxing loans such as if a policy is surrendered or lapses. If this happens, any outstanding loans are treated as cash value distributions and are then subjected to taxation if the amount is greater than the policy basis.
Other tax advantages include: not being taxed on funds accessed through the life insurance policy before the age of 59 ½ for possible retirement purposes (as long as you meet IRC guidelines), being able to switch investments within a portfolio without incurring additional taxation, and not adding to a tax burden as personal income increases like many other taxable accounts do.
If you looking for a great supplement to any retirement or savings vehicle, life insurance is a great option with many tax advantages. It is important, however, to understand how those tax advantages work to your best interest. Here at Ringo Financial, we are committed to helping you reap the full rewards and benefits of your life insurance policies as well as taking the necessary precautions to protect your hard earned assets.
There may be additional tax rules and regulations that require a more detailed analysis; this is why we recommend you also contact your CPA or tax professional to discuss your individual situation.