Cash Value Life Insurance Tax
Before we get into cash value life insurance tax, let us first distinguish the two main categories of life insurance. The first one is term insurance which offers absolute insurance protection. This means that only upon death of the policy holder will the beneficiaries receive the death benefit. If the policy holder lives long after the expiration of the insurance term, there is no value to be retrieved from the policy. When this happens, the insured party usually opts to have the policy renewed. Higher premiums will then be applied in such situations.
The second category is referred to as “permanent or cash value” life insurance. Whole life and universal life are inclusive in this type. The purpose of cash value life insurance is to offer long-term coverage for the insured person’s whole life. One feature of this policy allows the insured to accumulate cash value. Cash value can be made available to the policy holder through loans and other similar options. The effect of this, however, is a reduced amount left for the death benefit. Another additional feature is that, the rate of the premiums stays level even after many years. This makes it affordable for the policy holder which is advantageous for someone nearing his or her advanced years.
Compared to other financial products, permanent life insurance has a uniquely distinctive status. There are several tax advantages from this type of insurance policy. The policies are not subject to current taxation required by the law even when the cash value increases. The policy owner does not need to pay current income tax. This is true for interest on the cash value of the policy and other possible earnings. Another fact is that, owners who borrow from the cash value of the policy by means of loans do not have to pay income tax. Normally, loans are considered debts. However, in this case, the insured is not required to pay for the borrowed amount.
There are several considerations in taking out a loan on your insurance policy. For example, loans are charged with interest and getting a loan can potentially lower the value of the policy. Cash value can be subjected to income tax in some cases. This becomes possible when a particular ration of death benefit to cash value is not sustained. Lastly, if the policy was entered in a modified endowment contract, it may qualify as taxable.
Beneficiaries are not burdened with deductions for taxes from death benefits. They will receive the entire amount of the proceeds. It is completely free of deductions nor will a portion of the money be withheld. Probate costs and estate taxes can also be avoided using this type of insurance policy. For this to happen, another person must be named as the policy owner instead of the insured person. It must be done three years prior to the death of the insured. It would be wise to get the advice of legal and tax advisers for better understanding and preparation. Permanent or Cash Value life insurance has attractive tax benefits while ensuring whole life coverage for the insured party.