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Using Insurance as a Tax Shelter

By: Elite Legacy Education, January 19, 2018

Do you enjoy discovering new ways of saving money that would otherwise be paid to the government in the form of taxes? Well, you’re going to want to keep on reading if this sounds like you.

What is insurance?

Insurance is basically a guarantee to receive compensation in the case that something goes wrong. Of course, it’s not just if anything goes wrong. There are many types of insurance that exist and you must be covered under the right policy in order to receive compensation. For example, you must have car insurance in order to be covered in the case of an accident. Or, you must have homeowner’s insurance to be compensated in the case of theft. So as you can see, insurance essentially mitigates the risk of financial hardship by providing compensation if some specified conditions of an insurance policy are met. These conditions vary based on the type of insurance. For the sake of this article, let’s look further into life insurance.

A deeper look into life insurance.

We’ll start by discussing what life insurance is in the first place. As you may have guessed, life insurance provides compensation in the case of someone’s death or even after a set amount of time depending on the policy type. There are different types of life insurance coverage available to consumers. Here we will discuss the two major types:


  • Term life: Term life insurance provides coverage for a specified duration of time. Once that term is up, the policyholder must re-establish a new term contract, whether it’s through renewal or with a new insurer.
  • Whole life: Whole life insurance provides coverage for your entire life. Here, you make regular monthly payments that typically remain at a consistent level for the course of the policy.

You should know that there are other types of life insurance available, but for now we will just focus on these two. Let’s take a look at how insurance policies actually work.

How insurance works.

There are several components that come into play when dealing with insurance. You have the insurance policy itself, monthly premiums, the insurer, the policyholder and more. Here’s how each element works together to provide the necessary coverage.


First of all, an insurer will service the contract which contains an insurance policy. The insurance plan is registered under the name of the policyholder, where the policyholder is the individual covered by the policy. This agreement is then paid for by the policyholder through monthly premium payments. These premium payments represent the insurer’s compensation for servicing the policy and providing compensation to the policyholder in the case that anything goes wrong.

What are the benefits of having insurance?

There are many benefits of having insurance, the first of which is probably quite obvious. Let’s discuss these in detail:


  • Provides a financial guarantee. In the case that something goes wrong, insurance provides the necessary coverage to help mitigate financial hardship.
  • Can be required by law. Some types of insurance are required by law in order to conduct certain activities. For example, car insurance is often required in many countries in order for one to legally drive a vehicle.
  • May offer tax advantages. Certain types of insurance policies, such as whole life insurance, can provide tax advantages for policyholders.

Let’s take a closer look at the tax benefits of whole life insurance.

As we briefly mentioned above, whole life insurance offers tax advantages to its policyholders. Here’s how it works. We know that each month, the policyholder makes a payment towards the insurance premium. Of the total monthly amount, the premium payment is split into three sections. The first part covers the insurance portion of your policy, the second part covers administrative fees, while the final and remaining portion goes towards an investment portion for whole life insurance policies. This investment portion is unique to whole life insurance, essentially acting as an additional savings account. This savings balance accumulates interest and is tax-free until the time of withdrawal. Generally, if you decide to withdraw these funds, some portion of it will be completely tax-free. This portion is usually equal to the total amount of premiums you have paid thus far. Anything above this base amount could be subject to ordinary income taxation. Of course, all of this also depends on the specific whole life insurance plan you are covered by. There are some plans where you cannot withdraw the funds until the time of death of the policyholder. This is similar to retirement savings plans where if you withdraw the money before retiring, you could be subject to a financial penalty.

So as you can see, insurance has more benefits to offer than you might have initially thought. However, there is one essential ingredient to remember. You will want to set this up in a way so that your insurance premiums are paid using pre-tax income. By doing so, the tax-free portion of your policy will avoid any sort of taxation and is where the real tax-savings comes into play. Now you can keep more money in your pocket and continue learning about all the ways Elite Legacy Education can help you reach your goals.

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