The tax advantages of owning whole life insurance. Writing about taxes is something that I tend to avoid simply because tax laws can change at any time. One thing that seems to remain constant is the relationship between taxes and the permanent life insurance policy…to be more specific the whole life insurance policy.
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The main reason for buying any life insurance policy is to protect your loved ones in the event of your untimely death. A whole life policy tends to fit the bill perfectly, even though it costs more than term insurance. There are certain tax advantages to owning such a policy that a purchaser should consider.
The Death Benefit
If properly set up the death benefit of your whole life policy is paid to your loved ones free of income taxes. Your proceeds may be distributed in a lump sum or in the form of a monthly income. When writing the laws the lawmakers took into consideration that the proceeds of life insurance policies were paid to beneficiaries of a deceased breadwinner. Huge chunks could have gone to pay taxes but I believe the choice was made to pay out the proceeds free of income taxes so that things would be easier for the recipients…more often than not women and children.
Some consideration was also given to the owner of the life insurance policy which in most cases is the one who earns the larger portion of the family’s income. Cash values of life insurance accumulate interest over the life of the policy. Dividends accumulate interest as well. Dividends are not guaranteed. The interest on both cash values and dividends accumulate free of income taxes. The owner, premium payer, does not have the burden of additional taxes while the policy is in force. The taxes are paid when the policy is turned in to the company for its cash value.
Once your whole life policy has a cash value the owner is allowed to take a loan from the policy within certain limits. These loans are usually repaid over a period of time at a rate that is comfortable for the owner of the policy. If an insured dies before the loan is repaid the amount owed is usually deducted from the death benefit. Tax consequences may apply in this situation.
It used to be that the American people considered saving money very important but things have changed. The percentage of people who have significant savings is at the least bothersome. Taking into consideration the tax advantages of owning whole life insurance allows you to see this type of policy in an entirely different light. Whole life insurance can turn out to be a good vehicle through which to accumulate some cash. To say this is a great way to invest would be untrue but it can be a great way to protect your family.
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