The Tax Benefits of Life Insurance


What does a consumer get when they invite a life insurance broker over for coffee? Well, that depends on how he feels about his life insurance broker. The harsh reality is that when the average person hears the words life insurance, they break out in a cold sweat. Of course, any insurance broker can tell you that this fear is irrational, but very few people will take any comfort in that. These misperceptions, as genuine as they may seem, are unfortunate because a conversation about life insurance should be about so much more than the uncomfortable feelings consumers associate with it.

Sadly, sometimes people do not fully realize their need for life insurance until their need is too great or too costly, but completely necessary. Life insurance not only ensures that your family is taken care of if something befalls your health, but it can also provide tax benefits. If in doubt, you can see your personal tax accountant toronto or in another city to learn more about how life insurance can be advantageous for you.

Aside from that, people typically purchase life insurance policies to ensure the future of their loved ones and to ensure that they have enough money to live their lives after the person has passed away. In addition to taking out life insurance policies, many people choose to convert their properties into dynasty trusts in order to leave money to future generations while avoiding estate taxes. Gift, estate, and GSTT taxes may apply to assets transferred to a dynasty trust only when the transfer is made and if the assets exceed federal tax exemptions. The dynasty trusts, however, are subject to income tax. Individuals frequently transfer assets to dynasty trusts that do not generate taxable income, such as non-dividend paying stocks and tax-free municipal bonds, to reduce their income tax burden.

The same holds true for life insurance policies. They usually provide several benefits to the families who are left behind.

The Tax Benefits of Life Insurance

Some people consider the tax benefits of life insurance to be more of a wealthy man’s issue. However, this is not the case, because anyone who receives the proceeds from a life insurance policy can tell you that these proceeds are a tax-free benefit. Of course, you can get more clarity by discussing it with your personal financial advisor wollongong, or elsewhere. Nonetheless, this tax benefit means that when a young wife is mailed the proceeds of a life insurance policy after the unexpected death of her husband, this money is received tax-free. This is because the life insurance benefits are not part of the estate and are therefore not subject to any taxes the estate incurs. This tax-free status applies to both whole and term life insurance products.

Permanent life insurance policies, such as a whole life insurance policy, offers the insured a unique investment opportunity. In a whole life policy, monthly premiums are invested and this results in the growth of cash value within the policy. The growth of this cash value is tax-deferred as long as the policy remains active; and, depending on policy regulations, the insured may access this cash value as a tax-free benefit usually in an amount up to the basis. The basis is an amount equal to the total premium paid at the time of the cash value is withdrawn. After this point, any gain will be taxed as regular income. It should be noted that any dividends paid on a whole life policy are non-taxable because these dividends are considered to be a return of premium.

The insured may also choose to access this cash value money as a policy loan. Just like with a bank loan, policy loans will set up the terms for loan repayment. And, just like a bank loan, any amount borrowed as part of the policy loan is done so tax-free.

There is an exception to the tax-free loan or pay out of the cash value of a whole life policy only when that policy is a Universal life plan. Universal life insurance is a type of life insurance that credits any excess premiums over the actual cost of the insurance policy towards the policy cash value. Whereas whole life insurance policies set their premiums to never exceed the Mutual Tax Actuarial Reserve (MTAR), universal life insurance polices set a maximum premium that attempts to fall within this MTAR limit.

The tax benefits of a life insurance policy can offer consumers be it entrepreneurs or individuals of other occupations some very distinct advantages in both life and death. However, in order to learn more about the tax benefits and avail of them, individuals might need to seek the help of firms that provide tax resolution.

Moreover, consumers would be wise to ask their brokers which type of policy has the best tax advantages for their situations. This can allow them to be aware of their financial situations. is an initiative of independent insurance expert Tamara Humphries and LSM Insurance.

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