The Tax Benefits of Life Insurance

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What does a consumer get when they invites a life insurance broker over for coffee? Well, that depends on how he feels about his life insurance broker. The harsh reality is that the when the average person hears the words life insurance, they breaks 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.

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. This 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 The basis is an amount equal to the total premium paid at the time of the cash value is withdrawn.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 some very distinct advantages in both life and death. Consumers would be wise to ask their brokers which type of policy has the best tax advantages for their situations.

NoMedicalLifeInsurance.ca is an initiative of independent insurance expert Tamara Humphries and LSM Insurance.

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