The key tax benefits of life insurance are simple—life insurance is tax deductible in all but one case. If you are a company who “purchases” life insurance policies, you will pay income tax on the policy.
Beneficiaries of a policy that you own until your death will not have to pay income taxes on the amount. With whole life insurance policies, as the cash value increases, the additional value is not taxable.
To understand the difference it helps to understand the terminology. A life insurance policy is a plan you purchase to offer financial benefits at the time of your death. Life insurance policies come in a number of different amounts. You pay a premium every month, this payment covers you in case of death, either accidental or often suicide too.
If you do die while you are paying for a life insurance policy, the money is given to a beneficiary, the person to whom you have said you want payment made at the time of your death. Often, the beneficiary is a spouse, partner, child, parent, or sibling.
Some people want money before their death. They agree to name a life settlement broker as their beneficiary. Life settlement brokers are people to whom you sign over your life insurance policy for an immediate cash payment. You will receive the face value of the life insurance policy. The life insurance broker takes over your monthly premium, but they receive the full amount of the insurance policy when you die.
Life settlement brokers make a living by collecting money from life insurance policies. For this reason, the government makes them pay income taxes. An average person who collects life insurance at the time of their loved one’s death are not gaining an income per se, so income tax is never charges. This is one of the tax benefits of life insurance.
Another tax benefit involves purchasing a life insurance policy through your company. If you have the monthly or weekly premium deducted from the paycheck, you will find that amount is not taxed. This is an excellent way to purchase a life insurance policy. Many company purchased life insurance policies offer additional benefits such as doubled payment if the death occurs in the place of work.
If you own a whole life insurance policy, you know that you gain money as years pass. Interest and payments collect and that money is yours. The IRS does not tax the additional cash value.
With these thoughts in mind, you may find that the tax benefits of life insurance make owning a policy incredibly rewarding. Additionally, your loved ones will not be forced to grieve and make ends meet in the first few months of your death. It gives them a time to adjust to the financial tradition.