Most people don’t think that taxes and life insurance have anything to do with each other, but in reality, nothing could be further from the truth. One wrong move when purchasing your policy, and you and your beneficiaries could face large tax consequences, resulting in lost money. But on the other hand, if you play your cards right, you could actually see some tax advantages to your life insurance policy. For example, policies like whole or permanent life insurance can not only provide your family with financial security when you are gone, but can also help you avoid the taxes that come with stocks or retirement accounts. Find out just what tax benefits you could get from your life insurance policy.
First things first: you should be aware that, if you have a whole life insurance policy, the cash value that comes with your policy will not be taxed while it grows. Your cash value is tax-deferred, meaning your money will grow more because it is not being eaten away by taxes each year.
Tax-Free Exchanges For Other Policies
Did you know that you have the option to change your life insurance policy if it no longer works for you? Not only that, but if you decide to switch plans or buy a new one, you will not have to face any tax consequences: you will be able to do what is known as a tax-free 1035 transfer on your cash value, which is similar to rolling over a 401k.
Accelerated Death Benefits
If you are diagnosed with a terminal illness, or have to surrender your life insurance policy early, notify your life insurance company of your condition: if you meet the requirements of your policy, you could receive tax-free accelerated death benefits.
Early Distributions Are Tax-Free, Depending On Your “Basis”
If you have a whole or permanent life insurance policy, you will have a cash value that continues to grow tax-free over time, and if you decide to take an early distribution, or withdrawal, from your cash value, you will only owe taxes on any amount that goes over your what is known as you basis, or the amount you have paid in premiums.
So, let’s say you have a policy for which you have already paid around $10,000 in premiums, and your cash value is around $40,000. If you withdraw $5,000, you will not pay any taxes on your withdrawal, because it does not exceed the $10,000 premiums-paid basis. But if you choose to take out $30,000 from your cash value, you will owe taxes on the $20,000 that exceeds your basis.
Sometimes the unexpected happens, and you could need to borrow a large sum of money – if you do, you will be able to borrow from your life insurance policy, tax-free! You have the option to borrow an amount that exceeds the amount you have paid in premiums without facing any tax consequences by taking out a loan up to the amount you have in cash value. Just be aware that your insurance company will charge you interest until you pay the loan back, and each insurance company has its own rates; you will also have the choice to not repay the loan and have it deducted from your death benefit, or pay your loan back to keep your death benefits larger for your family. It is important to note, though, that if your policy lapses, you could owe taxes on the loan you have taken out.
Looking For A Policy?
Life insurance is a great way to protect your family and continue to help them financially when you are gone. They will need your help more than ever with their expenses after you pass, and the last thing you want them to worry about is money while they are grieving. There are many great affordable options to choose from that will provide tax benefits for your family, for a low monthly premium. The best way to find the right life insurance policy for you and your specific needs is by working with an agent who specializes in life insurance. We have provided the top life insurance companies in the nation below; each offers hassle-free assistance and the most competitive rates. Always check multiple sites to make sure you have bargaining power and know the advantages of each company. Make sure a hard time isn’t made harder by a financial burden, check life insurance rates today.