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. I just don't want to mislead anyone, especially on such a delicate topic.
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.
Cash Values
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.
Policy Loans
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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