One reason that people consider buying whole and universal life insurance policies is because they can take advantage of some possible ways to use these policies to reduce tax bills. This can include the tax bill of the people who might collect the proceeds from these policies later, and it can also include the tax bill of the policy owner while they are still alive.
What is Permanent Life Insurance?
Whole and universal life are examples of permanent policies. The features of both of these types of life insurance include:
• They remain in force as long as they are paid for or paid up, so they can provide a lifetime of coverage.
• Both universal and whole life policies can grow a cash account from excess premiums paid and some rate of return on those premiums.
• This cash value can get used while the policy owner is still alive, and the policy can also provide a tax-free inheritance to beneficiaries.
Possible Tax Advantages of Universal and Whole Life Insurance
The fact that policy death benefits are usually not taxed might be common knowledge. Still, it is worth remembering that they can provide a good way to transfer wealth to the next generation without also transferring a large tax liability.
However, there are some ways to take money out of a permanent policy without triggering taxes too. While you should always consult with a tax professional first, some options might include:
• Withdraw the basis of the cash account: This is the amount of money in the policy that comes from premium paid.
• Borrow against the policy: Having a permanent policy with a cash value is almost having a little bank that you can use to access funds with low-interest loans.
• Do a tax-free transfer: The IRS allows permanent policy owners to transfer their policies to some other kinds of insurance products without incurring new taxes. Allowed transfers might include annuities, long term care insurance, and other life insurance policies that include coverage for long term care insurance.
If you withdraw any of the gains from your cash account, you might trigger a taxable event. Any withdrawal from your policy could also reduce the face value or even risk taking it out of force if sufficient premium payments are not made.
However, it might give you extra peace of mind to know that you can purchase permanent life insurance that can be used as a type of piggy bank if you need money while you are still alive and provide a death benefit. You can always consult with your agent or life insurance company before making a transaction to see how it will impact your future benefits.
If permanent policies are so great, why do many people buy term life?
Term life policies are very popular because they are cheaper. For the same individual and amount of coverage, term life insurance costs less. In some cases, getting the less expensive policy is the best choice because the lower cost allows people to purchase a lot more coverage. In other cases, it might be smart to purchase a larger term policy to cover immediate needs like a home mortgage and a smaller whole life policy for the future. Remember that premiums only go up as people age, so it really is never to early to start considering retirement life insurance.
The right answer to which type of life insurance that you should purchase really depends upon your unique situation. Some factors that might influence your decision could include your life insurance budget, your age, and your long term goals.
At Trusted Senior Specialists, our experienced life insurance agents are eager to answer your question and help you shop for a great solution to your coverage needs. Since we work with many different insurers and policies, we can help clients find the best deal for their own unique situation.