Lower your tax bill with permanent life insurance

Proper tax planning should do two things: lower your taxes while you are alive and after your death as well. Permanent life insurance gives you the potential to cover both of these bases at once, where you can transfer your assets tax-free (income and equity) to beneficiaries and also accumulate tax-deferred cash growth within the policy.

Key takeaways

  • Permanent life insurance can allow you to transfer assets to beneficiaries tax-free, both on income and on equity.
  • These types of policies will become more important as people become less dependent on Medicare and Social Security.
  • If you think income and estate taxes will skyrocket, permanent life insurance can help you transfer your estate to a shelter.
  • Other ways to lower your taxes include using irrevocable life insurance trusts, maximizing retirement accounts, or simply giving it away now.

Your beneficiaries

When people think of life insurance, they generally imagine how it will help those they leave behind. First, let’s talk about what life insurance does for your family. It can allow you to pay for a child’s future college education, provide a retirement fund for your spouse, or simply make sure your survivors have the money to live the lifestyle you want for them.

Life insurance gives you the ability to transfer the death benefit of a policy free of income tax to the beneficiaries. No matter how large the death benefit is ($ 50,000 or $ 50 million), your beneficiaries will not pay a penny of income tax on the money they receive. What other investment does that do?

For example, beneficiaries can be hit by the Internal Revenue Service (IRS) when they inherit individual retirement accounts (IRAs), tax-deferred annuities, and qualified retirement plans. They could end up losing up to $ 0.35 of every dollar you put aside for federal income tax. This is not the case with life insurance. Also, life insurance guarantees that your heirs will get that money.


The growing federal deficit, the long-term health care crisis, and the uncertain future of Social Security and Medicare have brought down government safety nets. And it probably won’t get better during your life.

But you can rest easy knowing that the growth of tax-deferred cash within a life insurance policy is not vulnerable to the whims of the people who administer Social Security and Medicare. This is money that you could use to supplement your retirement income, pay for health care, or whatever you want, regardless of what the government does.

Thats not all. If you are collecting Social Security income, you may not know that you may have to pay income taxes on up to 85% of those benefits. Also, most taxable income, and even interest on tax-free municipal bonds, is counted when determining how much of your Social Security you can lose to the IRS. This is not the case with life insurance. The earnings that grow within a life insurance policy are one of the few items that will not increase your Social Security income tax.


Irrevocable life insurance trusts

Another option to pursue for people with a higher net worth is an irrevocable life insurance trust (ILIT). You make a cash donation to ILIT to purchase a permanent survivor life insurance policy. The ILIT is the owner and beneficiary of the policy. When the survivor dies, their heirs will not have to pay estate and income taxes on the death benefits.

Leave it right now

If you have more modest means and would like to see your money work for your heirs while you are still alive, as well as increase the amount they will receive when you die, then you might consider giving them cash. today.

To get the most benefit, your heirs can use part of the gift to buy a life insurance policy in your lifetime. In the meantime, you can watch your loved ones enjoy the rest of the money, right now.

Also, you will reduce your taxable estate by the amount of your donation. And because your loved ones are the policy owners and beneficiaries, they won’t have to worry about estate taxes or death benefit income when you pass away. They also won’t have to worry about paying income taxes on the growth of the policy’s cash value for as long as you live.

Solve other tax problems

Asset allocation

There are several versions of permanent life insurance. Some, like universal life insurance (UL), pay a fixed interest rate on the cash inside the policy. Others, however, like Variable Universal Life (VUL), offer dozens of investment options. These can include a large-cap stock fund, an international stock fund, a bond fund, or even a real estate fund. The list is almost endless.

The growth of the cash value in VUL is determined by the performance of the underlying portfolio (s) that you. This becomes part of your total investment portfolio. Reassignments within the policy are not taxable. So when it’s time to rebalance your investments, you won’t have to worry about paying income tax on the gains you make as you make changes to the VUL.

Retirement plans to the max

If you contributed the maximum amount to your 401 (k) and IRA this year, it is important to know that there are no restrictions on how much you can invest in permanent life insurance. Plus, you’ll at least get the advantage of tax-deferred growth and take advantage of the value of your estate.

However, remember that if you later withdraw cash from the policy, you will have to pay taxes on it at your usual tax rate. Therefore, do not consider this as a substitute for an emergency cash fund. That said, the policy could have a loan provision that allows you to borrow from its cash value and thus avoid the tax.

If you think income and estate taxes will skyrocket, permanent life insurance can help you transfer your estate to a haven that protects your assets from higher taxes.

Pennies on the dollar

If income and estate taxes keep you up at night, life insurance could be the answer. Permanent life insurance is one of the most powerful tax planning tools you can find. It offers several unique ways to address your estate tax and income tax obligations while solving those tax problems for pennies on the dollar. If you use this strategy, the upcoming tax season could look like another nice spring day.


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Mark Holland

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