Tax-Free Life Insurance
One of the advantages of life insurance – besides the protection you provide for your family after your death – is the tax savings you can benefit from. Tax-free benefits are only available for policies that build cash value from excess premium payments that are invested.
Tax-Free Borrowing
Cash values grow on a tax-deferred basis and are available for borrowing to fund a variety of needs – retirement, college savings, buying a home. You can borrow up to 90 percent of the cash value (tax-free) without breaking the terms of the policy, so the policy will continue to stay in effect. You must pay the loan back with interest. In the event that you do not pay the loan back before you die, the amount outstanding will be deducted from the death benefit.
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Cashing Out a Life Insurance Policy
If you choose to cancel your policy, the cash value will be paid out to you. You are only responsible for income taxes on any amount that exceeds the premiums paid. Also note that if you have previously borrowed against the cash value and have not repaid the loan at the time of surrender, you will receive a reduced cash surrender value.
- You will need to notify your insurance company and fill out the appropriate paperwork
- The new owner(s) will be responsible for paying the premiums; you are allowed to gift them up to $12,000 per person, per year, to be used towards premiums
- Since you will no longer own the policy, you will no longer be able to make changes to the policy
- You will need a written confirmation from your insurance company documenting the change of ownership
Death Benefit
Following your death, the death benefit is provided to your beneficiaries as tax-free proceeds. Be aware, however, that if you have a large estate (greater than $2 million), and the policy is in your name, it will be included in your estate and subject to estate taxes.
Life iNsurance as Estate Planning
If you anticipate your assets will be over $2 million, consider a life insurance policy as part of your estate planning. Otherwise, your beneficiaries will be facing a hefty estate tax. By either transferring ownership of your life insurance policy or putting the policy into an irrevocable trust, you will be able to provide your beneficiaries with tax-free proceeds following your death. Learn more about these topics in the advanced life insurance topics section.
Life-Insurance-Info.us is not a life insurance broker or carrier, and cannot issue life insurance policies. This site provides free information on insurance providers and coverage options. We are not associated with the companies profiled on Life-Insurance-Info.us and we make no representation, express or implied, that you will receive a quote from a specific company profiled herein. Products and policies may not be available in all states, and product and policy information is subject to change without notice. Please contact the insurance company directly to answer your policy inquiries.
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