Tax Incentives with Whole Life Insurance
The purpose of life insurance is to provide a means of financial stability for your loved ones if you should die without otherwise having amassed a fortune that they can live off of. Especially important for the very young couple starting a family. life insurance can bring a peace of mind in knowing that if the unexpected were to happen, your loved one(s) would be well-taken care of and financially be able to continue forward living as they had been - paying for college, paying the mortgage on the house, and managing other expenses, including your funeral. Even if you aren’t the primary breadwinner of the family, you should have life insurance to take care of the one that is and help to provide them with the means of paying to replace the important functions you perform: house maker, parent, educator, perhaps.
Whole Life vs. Term Insurance
When considering life insurance, the first question that many people stop to wonder about is the difference between whole life insurance and term insurance. Put most simply, a whole life insurance policy is designed to be in effect for your entire life. A term life insurance policy is only in effect for a time that you specify when signing up for a policy, usually 10 to 20 years. Whole life policies tend to be more expensive than term policies, but their premiums will stay constant throughout your entire life (or the life of the policy), imagine, however, being 20 and signing up for a low-cost term policy when you are young and virile and in the prime of life. Twenty years from now when that policy expires how much will you be paying for life insurance as a forty year old? Fast forward another twenty years and trying to afford to purchase another term policy as a sixty year old is going to be enormously expensive - much more than the steady premiums that have been paid by a whole life insurance policy which may have been started the same forty years ago.
Another benefit to the whole life policy is the cash value and savings that you get with the policy. Policyholders who pay faithfully on their premiums for years become eligible to take out loans against the policy or even to cash out their policy if they want to end it, receiving a portion of the account’s value in return. Another advantage in a whole life insurance policy is in the taxes and tax-management.
Tax Benefits of a Whole Life Insurance Policy
- Policy Loan Tax Savings:After a period of time when your whole life insurance policy has generated a cash value, you are allowed to take out a loan from the policy with certain tax benefits. If you die before you repay the loan, that amount that you still owe will be deducted from the death benefit to your family or beneficiaries.
- Sheltered Death Benefit: Properly managed and set up, the death benefit of a whole life insurance policy will be paid out to your beneficiaries free of income taxes.
- Cash Value Dividend: Cash value life insurance policies accumulate interest over the life of the policy. The dividends, though not guaranteed along with the interest both grow free of taxes.