Understanding The Tax Benefits of Permanent Life Insurance

An essential component of planning for a secure financial future involves making wise financial investments. While not many people would consider insurance an investment, as it is more of a security blanket for tough times, there are certain hidden benefits of insurance that not many are aware of. Just to be clear, we’re talking in particular about life insurance, which, one would argue, is the most important type of insurance for individual benefit.

Both term and permanent life insurance have their pros and cons, but they do work differently in some aspects. While term life insurance is generally easier to obtain, with lower premiums and quicker payout, permanent life insurance allows one to let the policy mature over time, and also add on a cash value to its current value of maturity. Hence, those who are looking for a more stable investment would consider the long-term benefits of permanent life insurance as a safer, smarter bet. Opting for insurance earlier on in life is also a safer bet, because there are different life insurance rates categorized by age.

That being said, life insurance, in general, doesn’t come under the strict radar of taxation, at least when compared to other financial instruments. There are certain exemptions and tax benefits one can take advantage of if the circumstance and situation allow it. Monetary policies have seen significant changes over time, more in favor of people opting for life insurance policies. When you take a closer look at it, it’s a win-win situation for both the population and the economy.

However, we’re going to focus more on the tax benefits of life insurance, as listed and explained below:

Additional growth without tax

As mentioned earlier, one can easily add on a cash value to a life insurance policy, apart from the coverage that they’ve opted for. Now, when the cash withdrawal is made, the entire amount can be withdrawn, including the cash value that had added on over time. The catch? The withdrawal needs to be made before the death of the recipient. The benefit? The entire amount is taxed as part of the policy, without any additional tax on the cash value which isn’t part of the original coverage. The only downside is that if the withdrawal is made post-death, the insurance company absorbs the cash value and the benefactor(s) receives only the policy coverage amount.

Some 100 dollar notes

Banking on dividends

People tend to restrict the coverage amount they opt for because of the high premium rates that they have to adhere to. In such a case, there is a way around: taking out dividends on the insurance policy. As long as the dividend amount is under the premium amount, one can use the dividend in a rotational cycle and pay off the premium using that amount. While there are no short-term gains with this, the long-term benefit is that a higher, more fulfilling insurance policy can be opted for and cashed out when the time comes. The benefit? The dividend taken out is exempt from taxes, so there are no additional charges to be worried about, and everyone is happy!

Making smart withdrawals

In times where emergency cash is required, taking out small amounts from an existing insurance policy is very much a possibility. Now, the question is, how much should be withdrawn? Ideally, if the withdrawal amount is under the cumulative amount of the premiums paid thus far, then the amount isn’t taxable. Anything larger than that would be taxed as gain. In such a case, one might consider canceling the policy, but that might not be the wisest decision. Instead, in order to be able to withdraw money, not pay taxes and still continue to have a maturing insurance policy, one can withdraw a sufficient amount, continue the policy and also not have to pay taxes.

Short term loan concept

Security for loan

When getting a loan from banks and financial institutions become a task, a life insurance policy can come to the rescue: in the form of security. Not many people know that life insurance can be used as a collateral to obtain a loan from a bank, and this benefit isn’t taxed either. Since no actual amount of money is being moved from the policy, the benefit has no taxation, and a loan can be obtained without hassle. The only clause here, of course, is that the benefactor relays the loan amount on time; else the insurance policy gets deducted and is also subject to additional interest amounts and penalties. So, if not having collateral is an issue, a life insurance policy is a very much viable option that doesn’t add on to the taxation charge.

Final Thoughts

All of the above-mentioned tax benefits facilitate the usage of life insurance beyond its standard, intended purpose. Of course, none of these exemptions are “loopholes” but more of additional pros that one can make use of and benefit from. The end goal here is to ensure that people are using and investing their money wisely, whilst being fully aware of the benefits they’re entitled to!

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