With the April 15th deadline for filing your personal income taxes looming, I figured it a good time to review the tax benefits of permanent life insurance. While I am not an advocate of investing solely for tax reasons it’s important to understand how your investing strategy is impacted by taxes. Let’s refresh together the income tax benefits afforded permanent life insurance.
1. Tax deferred growth on all cash value. This means that all increases in cash value, including your dividends, grow in your policy on a tax deferred basis. While tax deferred growth is good, what really counts is what you’ll have to pay when you want to use the money.
2. Tax free utilization of all cash value. Here is a key distinction between permanent life insurance and other types of tax favored accounts such as IRAs and 401ks. While you can get the same tax deferred growth in IRAs and 401ks, you are forced to give up access to your money until dates determined by the IRS, typically until age 59 ½. That means, with a few narrowly defined exceptions, you cannot use your money until that point without facing stiff penalties. If your permanent insurance policy is properly structured, you can utilize all of your money, at any time, for any reason, with no penalty. And, the money can be put back
3. Tax free transfer of death benefit to heirs. Here is another key benefit of permanent insurance. Any money left in the account is transferred via the death benefit to heirs of your choosing and your heirs receive the money 100% income tax free. This is particularly exciting when you think about perpetuating wealth across generations. Each generation can grow capital with no income tax, use the money with no income tax, then pass the remaining wealth on (you guessed it) with no income tax. It’s a sort of perpetual motion machine!
4. No contribution limits. Unlike other tax qualified plans, there are no contribution limits or phase outs. That means anyone, at any income level, can benefit from the system.
5. Privacy from the IRS. Because permanent insurance was around before the IRS itself was created, there is no reporting required to claim these benefits. As long as your policy remains incompliance with the IRS regulations of life insurance, contributions and distributions do not have to be reported. The IRS does not have to know how much is going in or coming out of your account.
As you can see, permanent life insurance provides some of the most powerful tax benefits available, without forcing you to compromise the use and safety of your money. So as you are preparing your taxes this year, take some time to analyze the tax advantaged investments you are making. If you find you are sick of giving up access to your own money, reporting everything to the IRS, and taking the risk of rising taxes in the future, contact us at Paradigm Life to learn more about setting up a plan or taking fuller advantage of the policy you already own.