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A Life Insurance Policy Might Offer Tax Relief

Posted on July 9, 2012 by bobrichards

Ensuring that a family may financially survive the death of its bread winner has been the principal purpose of life insurance. Through the years, it's developed  tax relief characteristics that increases its helpfulness as a store of value--for retirees also. Discover which tax advantage you can use.

Like a tax relief, life insurance can reduce income taxes for you or perhaps your beneficiaries. It can also bypass estate taxes (with correct estate planning) while you supply wealth to your loved ones.

To begin with, life insurance is available in two basic types-- permanent and term. Both provide a death benefit to a specified person upon the death of the insured. But only permanent life insurance builds a store of value translatable into cash. Permanent life insurance consists of whole life, universal life and variable life-- the latter two maintaining their store of value in market investments as well as supplying a few tax relief elements as we clarify.

Death Benefit Tax Relief

Producing a legacy through life insurance is primarily carried out via the death benefit payout. And there's no restriction to the dimension of the death benefit you can produce. The tax benefit is that your beneficiary receives it free of income tax (as long as the coverage is not in the insured's estate)-the ultimate tax relief. Like a comparison, the intergenerational transfers of other tax-advantaged investments eventually require you or your beneficiaries to pay tax on the earnings. See table summary.

 

 

Attribute

Cash  value of 

Life insurance policy

Death benefit 

to beneficiary

Taxation: Tax-deferred growth Not taxed
Contribution: Unlimited Unlimited
Affect social security tax: No No
Rebalance: Yes if portfolio -
Tax free access to cash value: Yes, by loan -
Taxed access to cash value: Yes , by surrender 

or settlement

-

 

Permanent Life Insurance's Store of Wealth Tax Advantage

As opposed to other tax-advantaged possibilities, there's no limit on the store of wealth you may have in your life insurance coverage-through growth or contributions. When you have maxed out contributing to other tax-advantaged opportunities (e.g. IRAs, 401ks), you can add more to your life coverage savings.

In case your life cover worth is allocated over investment sub-accounts (e.g. a variable life coverage), you have a tax relief when rebalancing these accounts while you pay no tax on any gains from sales. Like a comparison, you would pay tax on gains when rebalancing mutual funds.

Like other tax-advantaged opportunities, your life assurance money value grows tax-deferred making a tax relief throughout your lifetime. One benefit of life coverage savings
is that its profits won't have an effect on your social security taxation (per current tax law) as do other forms of income. Interest and dividends, along with tax-free interest on municipal bonds, can drive up your social security taxation if your income is sufficient.

While you're living you've access to the store of value of your life coverage coverage. In case your coverage enables, you are able to take a tax sheltered loan of its worth.

You Pay More Taxes Than Necessary

And we guarantee your CPA has never told you The problem with paying taxes is that most people overpay. So if you are concerned about having enough in retirement, you must stop overpaying taxes. I know you think your CPA takes care of this for you. WRONG. I AM a CPA (retired) and I can tell you that 90% of CPAs do nothing more than enter your information into the little boxes on the tax return but NEVER tell you how to pay less next year. Why? Many of them simply do not know what we can show you. In ten minutes.
Get Your Copy Now - 6 Ways to Cut Retirement Taxes

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Filed Under: Tax Savings

About bobrichards

Bob Richards
Editor | Involved in Various Marketing Positions within the Financial Services Industry

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