Permanent life insurance allows you to build cash value that you can tap into tax-free while alive and then create an income-tax-free inheritance for your loved ones after your death. Within specified limits, you can make withdrawals as long as the policy is current. You also can borrow against the value of the policy. Although permanent life insurance isn't tax-deductible, the cash value grows tax-deferred.

Your Beneficiaries

When people think about life insurance, they generally envision how it will help those they leave behind. If you pass away, the death benefit can pay for a child's future college education, provide a retirement fund for your spouse, or simply make sure your survivors have the money to live the lifestyle you want for them.

The life insurance death benefit is completely income-tax-free to beneficiaries. No matter how big the death benefit is—$50,000 or $50 million—your beneficiaries won't pay a single cent of income tax on the money they receive.

This is not true for most other financial accounts. For instance, beneficiaries can be walloped by the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS) when they inherit 澳洲幸运5官方开奖结果体彩网:individual retirement accounts (IRAs), 澳洲幸运5官方开奖结果体彩网:tax-deferred annuities, and 澳洲幸运5官方开奖结果体彩网:qualified retirement plans. Life insurance creates a more tax-effective inheritance.

Cash Value Tax Benefits

Permanent life insurance can build cash value, a reserve of money you can access while alive. You could use this money to supplement your retirement income, pay for medical care, or use as an emergency fund. Cash value grows 澳洲幸运5官方开奖结果体彩网:tax-deferred. You don't owe income tax as🗹 long as the money stays in your policy.

You can withdraw up to your premium payments tax-free. If you withdraw more than that, you do owe income tax on your gains above what you paid. However, you can also access your cash value through a loan. If you borrow it this way, you do not owe income tax for taking out your gains. This can keep you in a lower tax bracket in retire🍎ment and prevent taxes on Social Security.

You do not ever have to pay back the loan while alive. If you pass away with an outstanding loan, the death benefit pays it off, and then 澳洲幸运5官方开奖结果体彩网:🐷your heirs receive the remainder income-tax-free. The drawback to a cash value loan is that the insurer will charge interest. If the size of your loan plus interest exceeds your total cash value, you would need to pay more into the policy, or it will lapse.

Investment Tax Benefits While Alive

Asset Allocation

There are several versions of permanent life insurance. Some, such as 澳洲幸运5官方开奖结果体彩网:universal life (UL), pay a 澳洲幸运5官方开奖结果体彩网:fixed interest rate on the cash within the policy. Others, however, such as 澳洲幸运5官方开奖结果体彩网:variable universal life (VUL), offer dozens of investment options. These might include a 澳洲幸运5官方开奖结果体彩网:large-cap stock fund, an 澳洲幸运5官方开奖结果体彩网:international stock fund, a 澳洲幸运5官方开奖结果体彩网:bond fund, or even a real estate fund. The l﷽ist i🐽s nearly endless.

The growth of the cash value in VUL is determined by the performance of the underlying portfolio(s) you chose. This becomes part of your total investment portfolio. Reallocations within the policy are not taxable. So when it comes time to 澳洲幸运5官方开奖结果体彩网:rebalance your investments, you won't have to worry about paying income tax on profits you take as you make changes in the VUL. Your investments also grow tax-deferred, like any other cash value options.

Maxed-out Retirement Plans

If you already contributed the maximum amount to your 401(k) and IRA this year, pe✅rmanent life insurance could help you save more. There are no restrictions on how much you can put into permanent life insurance. It's another way to access tax-deferred growth after you've maxed o🍌ut your retirement plans.

In addition, there are no income restrictions for using permanent life insurance, like on a Roth IRA. You can use this tax-deferred investment strategy no matter how much you earn.

Strategies for Taxes on Death Benefits

Give It Away Now

If you would like to see your money working for your heirs while you're still alive, as well as increase the amount they'll receive when you die, then you might want to consider giving cash to them today. For the greatest benefit, your heirs can use part of the gift to buy a life insurance policy on your life. Meanwhile, you'll be able to watch your loved ones enjoy the remainder of the money—right now.

What's more, you'll reduce your 澳洲幸运5官方开奖结果体彩网:taxable estate by the amount of your gift. And, because your loved ones are the owners and beneficiaries of the policy, they won't have to worry about estate or income taxes on the death benefit when you die. They also won't have to worry about paying income taxes on the growth of the life insurance cash value as long as they keep it in th༒e policy.

Irrevocable Life Insurance Trusts

Another option for individuals with higher net worth is an 澳洲幸运5官方开奖结果体彩网:irrevocable life insurance trust (ILIT) that purchases the insurance policy directly so as to exclude it from one's personal estate. You make a cash gift to the ILIT to purchase a permanent 澳洲幸运5官方开奖结果体彩网:survivorship life insurance policy. The ILIT is the owner and 澳洲幸运5官方开奖结果体彩网:beneficiary of the policy. When the survivor dies, your heirs will not have to pay estate and income taxes on the death benefits.

The Bottom Line

If income and estate taxes keep you awake at night, life insurance might be the answer. Permanent life insurance is one of the most powerful 澳洲幸运5官方开奖结果体彩网:tax planning tools you can find. It offers several unique ways to address your estate tax and income 澳洲幸运5官方开奖结果体彩网:tax liabilities both while you're a☂live and for your heirs after you pass😼 away.