In addition to offering your loved ones financial protection and security, life insurance has a variety of other benefits, including tax advantages. For example, if you have a permanent life insurance policy, the cash value grows on a tax-deferred basis, meaning you can accumulate the cash value over time without being taxed on the growth, providing an opportunity for tax-advantaged savings. You may also take out loans against the cash value of your life insurance policy without triggering immediate tax consequences. In this article, we’ll walk you through the various tax advantages offered by life insurance policies and how certain types of coverage can be used as financial tools.
Is life insurance tax deductible?
One of the common questions that may cross your mind when considering the tax advantages of life insurance is whether or not your policy is tax-deductible. Generally, the premiums paid for a personal life insurance policy are not tax-deductible. However, there are some exceptions, including:
Business-Owned Policies: In some cases, if a life insurance policy is owned by a business and the premiums are paid as a business expense, the premiums may be tax-deductible.
Self-Employed Individuals: Self-employed individuals may be able to deduct a portion of their life insurance premiums as a business expense, especially if the insurance is used to provide coverage for the business or to secure a business loan.
Estate Planning and Charitable Giving: Certain types of life insurance used for estate planning purposes or charitable giving may offer potential tax benefits. For example, premiums paid for life insurance used to fund an irrevocable life insurance trust (ILIT) or to make charitable donations through life insurance may have tax advantages.
What are the tax benefits of permanent life insurance policies?
Because of their cash value component, permanent life insurance policies, like universal and whole life insurance, can be used as a financial tool and offer tax advantages. Insurance companies will make dividend and interest payments towards the cash value of your policy, helping it grow over time. The interest added to your cash value is typically not taxable by the IRS, and the annual dividends (if your policy is eligible for them) are also usually tax-free. This means that policyholders can accumulate cash value within the policy without being subject to annual income taxes on the growth of the cash value. Policyholders also have the ability to access the cash value through tax-free withdrawals and policy loans. Withdrawals up to the amount of premiums paid into the policy are generally not subject to income tax.
When is the best time to get life insurance?
You can secure life insurance at any time of the year, but the transitional spring season poses a great opportunity to check this priority off your to-do list. After all, spring isn’t just for organizing your closets and deep cleaning your home—it can also be a time to take a look at your whole financial situation and ensure you have everything in order. Plus, with tax season underway, this time of year is the perfect opportunity to ensure all of your assets are protected.
When purchasing life insurance, you’ll have to decide which of the traditional policy types is right for you: term life insurance or permanent life insurance. Term policies are an affordable way to ensure not only your loved ones are protected financially, but also that your assets and investments are protected, too. A term policy can also offer the opportunity to better balance your financial portfolio, plan for future expenses, and help you continue to grow a legacy for years to come.
Permanent life insurance, on the other hand, is intended to last your entire lifetime as long as premiums are paid. Permanent policies typically include a cash value, which grows on a tax-deferred basis, meaning you can accumulate the cash value over time without being taxed on the growth. You could also take out loans against the cash value of your life insurance policy without immediate tax consequences. These unique benefits make this policy type a good option for those who want an additional financial asset for their portfolio.
Let SelectQuote Help You Navigate the Benefits of Your Life Insurance
If you have a life insurance policy, it’s important to understand all the benefits your coverage offers. At SelectQuote, we make it easy for you to take full advantage of your policy, including the tax benefits, to help you use it as a financial tool whenever possible. If you’re looking for a new type of coverage that offers additional benefits, like a whole or universal life insurance policy, our licensed insurance agents can help you compare rates from several of the nation’s most trusted carriers in just minutes.
