4. Tax-Advantaged Access to Cash When Needed
Most potential buyers don’t understand that permanent life insurance policies have contractual features that allow the owner of the policy to withdrawal cash from the policy using tax-advantaged loans and withdrawals.
Money borrowed or taken from the cash value of a life insurance policy is generally not subject to income taxes up to the “cost basis” — the amount paid into the policy through premiums.
Also, there are no regulatory restrictions on how the cash taken from a life insurance policy must be used by the owner. This creates significant flexibility to use the cash to fund a variety of needs, be they health or personal needs, such as putting on a new roof.
5. Supplemental Source of Tax-Free Retirement Income
Policyowners can withdraw or borrow against the value of their permanent life insurance contracts for any need, like supplementing their retirement income. If this benefit is used, the policyholder needs to clearly understand that tapping a life insurance policy’s cash value decreases the remaining cash value as well as the death benefit.
6. Tax-Free Way to Leave a Legacy
Life insurance can be used to create an income tax-free legacy to beneficiaries using the income tax-free death benefit. For very large death benefits there is the possibility of triggering estate taxes, which must be planned.
Legacies can be created for family members, charities, religious organizations and educational institutions. This can allow individuals to benefit numerous entities using the leverage that the life insurance death benefit creates.
The key takeaway is this: When you read about tax advantages provided to the middle class, the benefits of life insurance are infrequently mentioned.
Life insurance offers significant tax benefits that provide families with protection, the ability to accumulate cash and leave a legacy to those they care about. We need to beat the drum louder to promote these intrinsic benefits.