Tax Minimization
Life insurance is a unique financial instrument with features that are unavailable in any other financial products—particularly its tax attributes. Thus, in addition to the risk management aspects, properly designed and implemented life insurance can go a long way in helping you and your beneficiaries minimize tax burden.
For starters, the life insurance cash value grows without being taxed as it accumulates. On the other hand, investment earnings from a bond portfolio is generally taxed along the way as ordinary income.
You can also access the cash value without triggering income tax. Withdrawals up to the cost basis or borrowing against a policy cash value is not subject to taxes.*
Additionally, the death benefit is generally paid out free of income tax. By contrast, when beneficiaries withdraw money from a retirement plan, they generally pay taxes on the distributions.
These favorable tax attributes unique to life insurance open up opportunities for creative tax minimization strategies for large estates, businesses and highly compensated individuals.
For example, well-designed life insurance can be an integral part of your investment portfolio, functioning as a low-volatility, tax-advantaged asset without stock market risk. And unlike IRAs and qualified retirement plans, there are no contribution amount limits, early withdrawal penalties, or required minimum distributions.
Similarly, a business or a nonprofit can provide a supplemental retirement benefit to its key employees above qualified plan limits with potentially substantial tax saving to the employee, while protecting both the employee's family and the organization from an untimely death of the employee.
Furthermore, instead of (or in addition to) drawing income from investments that are fully or partially taxed during retirement, you can help keep your tax bracket down by integrating distributions from life insurance into the mix with tax-free loans and/or withdrawals.*
For starters, the life insurance cash value grows without being taxed as it accumulates. On the other hand, investment earnings from a bond portfolio is generally taxed along the way as ordinary income.
You can also access the cash value without triggering income tax. Withdrawals up to the cost basis or borrowing against a policy cash value is not subject to taxes.*
Additionally, the death benefit is generally paid out free of income tax. By contrast, when beneficiaries withdraw money from a retirement plan, they generally pay taxes on the distributions.
These favorable tax attributes unique to life insurance open up opportunities for creative tax minimization strategies for large estates, businesses and highly compensated individuals.
For example, well-designed life insurance can be an integral part of your investment portfolio, functioning as a low-volatility, tax-advantaged asset without stock market risk. And unlike IRAs and qualified retirement plans, there are no contribution amount limits, early withdrawal penalties, or required minimum distributions.
Similarly, a business or a nonprofit can provide a supplemental retirement benefit to its key employees above qualified plan limits with potentially substantial tax saving to the employee, while protecting both the employee's family and the organization from an untimely death of the employee.
Furthermore, instead of (or in addition to) drawing income from investments that are fully or partially taxed during retirement, you can help keep your tax bracket down by integrating distributions from life insurance into the mix with tax-free loans and/or withdrawals.*
* Tapping into the cash value of a life insurance policy reduces its value and death benefit and increases the chance of policy lapse. In the event of a policy lapse, an outstanding loan in excess of the cost basis is taxable. Loans and withdrawals from a modified endowment contract may be subject to tax and penalty.
Save on Taxes
// Accumulate money without being taxed on growth // Withdraw money without triggering income tax // Save money without contribution limits or distribution requirements // Add a low-volatility asset without stock market risk to your portfolio // Coordinate retirement income to keep tax bracket down // Carve out tax-efficient benefits exclusively for key employees |
