Avoiding Taxes Entirely On “Inheritance” Money
The first and most important tax benefit of life insurance is the ability it gives you to transfer the death benefit of the policy to your heir(s) 100% tax free. It makes no difference what the value of the death benefit is – whether $100,000 or $1 million, it is all exempt from taxation.
Given the high costs of inheritance tax (the “death tax”), anything you can give to your heirs that totally avoids taxation is a huge benefit. And there is no limit to how much money you can invest in life insurance, unlike many other investments like 401Ks or health savings accounts.
Consider that an IRA or tax deferred annuity left to your survivors could be taxed a whopping 35%, while life insurance benefits are taxed 0%.
Tax Deferrals and Investment Flexibility
Both term and whole life insurance give you a tax-free death benefit, but with whole life (in its various forms), you also get a tax shelter and the ability to manage (to the extent allowed by the policy and the law) the investments that are the basis of your policy’s interest-bearing status.
With whole life, you can shelter money in your life insurance policy and then borrow it back out tax-free too (but you have to pay it back eventually or pay taxes on it).
Your policy accumulates a cash value that you can always cash it in for, while the death benefit still applies in the event you pass away so long as you still have the policy.
What this all adds up to is the ability to use your life insurance policy as a kind of quasi-investment and emergency fund, while keeping it tax sheltered. As long as you pay back the money borrowed out in time, you still avoid taxes.
Lowering Taxes On Your SS Benefits
Right or wrong, as much as 85% of Social Security benefits can be subject to income taxes. And how much other taxable income you have will impact how much of your SS benefit is taxed.
When you leave your spouse a big death benefit via life insurance after your pass away, they will not only avoid taxation completely on the benefit itself; but it can have the ripple effect of lowering the portion of their SS benefit that is taxable.
These are just three of the most important ways that investing in a good life insurance policy can save you or your beneficiaries money on taxes.
To learn of yet other ways life insurance can help lower taxes, or for a free life insurance quote and/or consultation, contact Flagler County Insurance Agency today!