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.  Coverage 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 coverage 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 vs. Term Coverage

When considering protection, the first question that many people stop to wonder about is the difference between whole life and term insurance. Put most simply, a permanent policy is designed to be in effect for your entire life. A term agreement is only in effect for a time that you specify when signing up for a plan, usually 10 to 20 years. Permanent policies tend to be more expensive than term policies, but their premiums will stay constant throughout your entire lifespan (or the length of the plan), imagine, however, being 20 and signing up for a low-cost term agreement when you are young and virile and in your prime. Twenty years from now when that agreement expires how much will you be paying for coverage as a forty year old? Fast forward another twenty years and trying to afford to purchase another term product 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 plan which may have been started the same forty years ago.

Another benefit to the whole life route is the cash value and savings that you get with the plan. 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 permanent policy is in the taxes and tax-management.

Tax Benefits of a Whole Life Insurance Plan

  • Policy Loan Tax Savings:After a period of time when your 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 plan will be paid out to your beneficiaries free of income taxes.
  • Cash Value Dividend: Cash value policies accumulate interest over the length of the agreement. The dividends, though not guaranteed along with the interest both grow free of taxes.