Nothing is certain except death and taxes, Benjamin Franklin once wrote. However, life insurance policies can afford us a brighter outlook by providing strategies to reduce taxes. Making the choice to purchase life insurance is a decision to protect your loved ones and help them maintain their quality of life. When establishing this legacy for a partner or child, it is important to consider the tax minimizing incentives of different policies.
When protected by life insurance, your beneficiaries will not owe income taxes for acquiring your estate regardless of the end-all total value. Although in some cases, the death benefit can be considered taxable. If the estate is worth more than $5.45 million your loved ones will be subject to an estate tax – if you fall into this category, a life insurance trust is a wise option to consider. In establishing a trust, you defer ownership of your life insurance policy to a trustee and they become responsible for paying the premiums, but it will save them costly estate taxes in the future. A life insurance trust must be validated at least three years prior to death for it to be legally binding.
Most of us won’t have to worry about this estate tax. However, there are other strategies through life insurance that the average American family can implement to minimize taxes.
More often than not, people opt for term life insurance that will protect them for a set number of years. However, if you’d rather have your life insurance premiums accumulate cash value and protect your family indefinitely, permanent life insurance could offer you more value and a sense of security. When you pay premiums for permanent life insurance, a chunk of that expense is put into an account that accumulates interest and is considered tax-deferred; you will only be taxed on the amount over what you paid into the policy during the withdrawal period.
Permanent life insurance can also protect you in retirement. You can borrow against your account’s death benefit whenever you wish, as long as you keep the account active by paying premiums. With proper planning, this can act as a form of tax-free retirement income.
While you strive to best protect your loved ones, invest in the life insurance that will offer you and your beneficiaries the most tax minimizing advantages.