Heather Halpern

 Does Life Insurance Provide Tax Benefits? During tax season, does life insurance ever cross your mind? Usually, we are too overwhelmed with tallying receipts, figuring out gas mileage, and making sure we have all the correct documentation ready for our accountant. Our life insurance is usually never even considered. This is a sad oversight on our part as life insurance can and will provide tax benefits. Life insurance is primarily purchased for its foundational purpose. This purpose is to help financially protect loved one’s in the event that the policyholder passes away. Many people do not realize that life insurance can also provide tax benefits. We have outlined the biggest tax benefits you can receive from your life insurance below. There are many different types of life insurance, we are going to focus on whole life insurance which offers its policyholders a variety of great tax benefits. 1. Death Benefit The first way life insurance helps with a tax benefit is with the policy’s death benefit. Life insurance beneficiaries will not have to pay taxes on the life insurance policy payout. Considering that most life insurance payouts are of a substantial size, this should provide the policyholder and beneficiary major relief. Beneficiaries listed on retirement plans and policies are usually taxed a significant amount. Life insurance payouts are not only tax-free but they are also given to beneficiaries much quicker than property and other types of physical assets. For example, even if a will is left, an estate that is to be passed onto a family member needs to process through probate before being transferred to that family member. This can take up to several months. A life insurance payout is typically given to beneficiaries within weeks of the filing. This is one way in which having a life insurance policy provides a great tax benefit. 2. Cash Value Accumulation The second way life insurance provides a tax benefit is by accumulating actual cash value over time. As long as the policyholder pays premiums, the life insurance cash value builds. This cash builds without a tax penalty. This is better known as tax-deferred and means the IRS can not tax this cash value accumulation. Your money will grow at a faster rate than if put somewhere else because it is not being reduced by taxes each and every year. More than likely, your prime working years are when your earning power will be at its highest. This means you will be put into a higher income level bracket. Meaning you will be paying higher taxes in the years that you are earning the most amount of money. Thus if you take out your money later on in life, when you’re presumably making less money and in a lower tax bracket, you will get taxed less than you would have when you first put the money into the life insurance policy. In some cases, like whole life insurance, the growth rate of the cash value is guaranteed by the insurance company regardless of market conditions. Your cash value is also likely to grow from payments the insurance company shares with policyholders from their profits. This is better known as the annual dividend payment. Different types of life insurance offer different investment options. Make sure you research this in-depth with a life insurance representative at your company or at a company you’re looking to purchase with. 3. Access to Cash Value Accumulation The third way life insurance provides a tax benefit is by allowing the policyholder access to cash already paid to the policy without being subject to taxes up to the amount paid by premiums. Again, this cash is on a tax-deferred basis. Meaning once again the IRS can not touch it. For example, Amanda bought a life insurance policy 25 years ago. During retirement, Amanda has a couple of different ways to access her policy’s cash value Amanda has a cost basis of $132,840. This is the total amount of premiums she has paid. Amanda is able to take a partial surrender of her policy’s cash value up to $132,840 and it would be 100% tax-free. Amanda also has the ability to borrow against her cash value. The amount she borrowed would not be considered taxable income, even if she borrows more than her cost basis. Accessing life insurance cash value in these ways can incur a penalty tax. It also reduces the value of the cash value for beneficiaries for the death benefit. Always make sure you consult with a financial professional to discuss the specifics of your exact situation. Life insurance serves many great purposes. Its primary role is to provide your loved ones financial stability in your passing. However great tax benefits can also be had from having a life insurance policy. Some of these benefits include cash value accumulation, access to cash value accumulation, and quick and tax-free payment to your loved ones.