Exact matches only
Search in title
Search in content
Search in comments
Search in excerpt
Search in posts
Search in pages
Search in groups
Search in users
Search in forums
Filter by Custom Post Type
Filter by Categories
Health Care
Healthy Lifestyle
Personal Finance
Your Financial Life
By Transamerica / Jul 18, 2014

Tax Advantages of Cash-Value Life Insurance


Cash-value life insurance provides coverage on an insured person’s life through a death benefit that generally passes to beneficiaries free of federal income tax. The tax-free death benefit can be especially important for those concerned about estate taxes. But cash-value life insurance can also provide significant tax benefits while you’re still alive.

Below, we have provided a brief overview of some of the tax advantages associated with cash-value life insurance.

1. Tax-deferred earnings: You do not have to pay taxes on any gains in the policy during the year in which they are earned or while they remain in the policy. Taxes are deferred until the policy is surrendered, lapses or when certain distributions occur. Gains left in the policy can continue to accumulate and lead to potentially higher policy values.

2. Tax-free withdrawals: Premiums paid into a policy can be taken tax-free up to your cost basis in the policy.

3. Tax-free loans: If there is still ample cash value in the policy, you can continue taking money out in excess of your cost basis, though tax-free loans. The loan interest rate is generally lower than the loan rate charged by banks for similar secured loans.

4. Federal income tax-free death benefit: In most cases, the death benefit passes to your beneficiaries free of federal income taxes, providing an excellent way to transfer wealth to a spouse or the next generation.

Insurance companies offer a wide variety of cash-value or permanent life insurance products with different features and benefits. It’s important that you do your research before purchasing a life insurance policy to ensure that you understand how its features and benefits work, as well as what fees and charges are associated with the policy.

Distributions, such as loans and withdrawals, can only be made if the policy has been in force long enough to accumulate sufficient value. Loans and withdrawals will reduce the policy value and death benefit. Loans are subject to interest charges. If a policy lapses while a loan is outstanding, adverse tax consequences may result. Policy loans are generally not taxable when taken, and cash withdrawals are not taxable until they exceed the cost basis in the policy. However, if the policy is treated as a modified endowment contract (MEC) by IRC Sec. 7702A, withdrawals and loans are taxable at an ordinary income tax rate when taken to the extent of gain then in the contract and may also be subject to a 10% federal income tax penalty if taken prior to age 59½. Cash distributions associated with benefit reductions, including reductions caused by withdrawals during the first 15 years, may be taxable. Policy owners should consult with their tax advisor regarding their particular situation.

Transamerica and its agents and representatives do not provide tax or legal advice. The information contained in this article is for informational purposes and should not be construed as legal or tax advice. For legal or tax advice concerning your situation, please consult with your attorney or professional tax advisor.