Whole Life Insurance Can Offer Tax Advantages When Use Correctly
If you’re in the market for low cost, simple life insurance as a way to protect your family in the event of your death, then term insurance is the best option. But if you are a high net worth individual or have a need to shelter income, whole life has many benefits.
What Is Whole Life Insurance?
Whole Life, as well as Universal Life, are types of permanent life insurance products that provides a death benefit until age 120 as long as the policy remains in force. It also includes a cash account which earns and accumulates earnings. This cash account is one of the key elements of permanent insurance.
Savings vs. Investment?
You can invest your cash in the market if you invest it wisely, but a permanent life policy can be structured to produce EVEN BETTER results WITHOUT any risk or paying ANY taxes! This is especially true in 2 specific situations: 1.) you have a high Net Worth or 2.) your annual gross household income is $150k/yr or more. Let’s focus on the 2nd situation.
Benefits To High Income Earners
If you are unable to contribute into an IRA/Roth IRA, or have maxed out other retirement account contributions, let’s see how permanent life products offer a very attractive income stream:
- Dividends inside an IRA are generally taxed as gains. In the case of life insurance, however, the IRS treats dividends as a return of premium and they are not taxable.
- Investing with mutual funds, stocks, or bonds is subject to market losses, but your cash account with life insurance is not! Life insurance can guarantee that you never lose a penny.
- A properly structured permanent life insurance policy can earn healthy dividends or credits regularly. Whole life, in fact, has a built-in guaranteed compound interest component.
One Example Of How Whole Life Adds Value For High-Income Earners
Let’s say you have an extra $35k/yr to put aside, you can overfund a whole or universal life insurance contract (not term life) where the growth will have income tax due—not capital gains tax—if surrendered. In order to access the cash in the policy without surrendering, you may take a policy loan which is tax-free. If you die, the face value goes tax-free to the heirs and the cash value is available for them as well. This is just one example how life insurance acts like a Roth IRA on steroids.
If you have either of these situations, the tax advantages may be a good reason to consider whole or universal life.
Contact Gail today at Mountain Insurance: Longmont for a review of your life insurance needs at 303-808-9351, x5.