There are many benefits that come when you own a whole life policy besides just the death benefit; and rarely do you see much written about the living benefits. However there are a lot of tax benefits too. When you own a whole life policy or permanent insurance policy, it accumulates a cash value that offers unique tax advantages. And if your policy is structured properly, you could even qualify yourself for tax free benefits.
Here are the biggest tax benefits that come with permanent cash value insurance:
- You pay NO federal income tax on the cash value growth
- You pay NO federal income tax if you borrow cash from your policy with a policy loan
- Your beneficiaries typically pay NO federal income tax on the death benefit
Tax Benefits and Life Insurance Explained
- Because permanent life insurance is a product that has been in use for over a hundred years, it is not treated the same way that current saving accounts are – the government does not set mandates on the use of your policy. Your money is sheltered inside your policy, which is why the cash value growth does not get taxed.
- Borrowing from your policy is a method that allows the policy owner tax-free liquidity. When you borrow it is not considered a taxable event. The best thing about borrowing from yourself is that the interest earned goes back into your policy and increases your cash value, making your borrowing power exponentially grow. We refer to this as the velocity of your money in motion.
- Though your beneficiaries typically do not get taxed on the death benefit, the IRS likes to find ways to tax, so we recommend you consult an estate-planning attorney when you are configuring how to include your policy in your estate. However, one way to avoid a potential estate tax can happen when you transfer the ownership of your policy three years prior to death.
Contact a Paradigm Life agent to properly structure your policy, and help you get maximum tax benefits.
For further reading on tax benefits and life insurance read:
Avoiding Inheritance Tax: A lesson from Philip Seymour Hoffman
The Whole Truth About Whole Life