People tend to overlook the tax advantages of life insurance, but reducing the tax bill for your beneficiaries is just as important as cutting down your taxes while you are alive. A death benefit is often paid out tax-free, leaving a piece of financial future for your family free from estate and income taxes.
Other policies offer this along with a variety of tax benefits, including some features that help you accumulate tax-deferred cash value while you are alive. These policies may even be able to provide payments in the event of chronic illness or disability, while still others may be able to replace your income upon retirement.
Insurance policies are safety nets that give financial security and peace of mind to you and your family. The incredible variety of policies out there means your coverage can be tailored precisely to your needs. Here are some ways your policy can provide tax advantages in life and after death.
Build Cash Value with Permanent Life Policies
Permanent life insurance is an overall term for a policy that provides lifelong coverage. This coverage delivers funds to your beneficiaries, as you would expect, but it also features unique savings components that differ from your typical term policy.
Part of each premium in these types of policies can be converted to "cash value." Life insurance that builds cash value will protect your money from being taxed as it grows. When it comes time to take this money in cash payments, it will have gained interest on a tax-deferred basis, meaning you can build a legacy without losing some to the IRS each year.
"Life insurance that builds cash value will protect your money from being taxed as it grows."
Use Your Cash Value on Tax-Advantaged Terms
Over time, you can borrow against the cash value in these types of policies, allowing you to make the most out of the accumulated amount. Certain policies allow you to take tax-advantaged cash value distributions in retirement, but this borrowing can also be done whenever necessary and is not subject to taxes up to a certain threshold.
It is important to be careful, though — tapping into the cash value of life insurance can reduce its death benefit, and if you take too much, the policy could lapse. Still, with the right amount of planning and care, these policies are essential if you want to take advantage of things like compound interest, tax advantages, and even market protection.
"Certain policies allow you to take tax-advantaged cash value distributions in retirement."
Cut Your Tax Bill with Life Insurance
With a complete understanding of your policy and its features, you might be able to provide for your family tax-free, both in the form of a death benefit and in cash value to use while you are alive. If you are looking for tax advantages in your life insurance policy, talk to your financial services professional today.