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Lower Your Income Tax with Life Insurance

By: Elite Legacy Education, February 9, 2018

Are you a fan of reducing your income tax? Well of course, you are – who isn’t? You may recall in a previous article, we’ve discussed some of the tax-savings associated with owning a life insurance policy. So in this piece, we’re going to dive deep into life insurance, explore all of the different types and unveil the tax advantages of each one – if there are any. With that said, let’s get into the four different types of life insurance policies.


Term Life – This tends to represent the cheapest life insurance option. Here you simply specify the length of the agreement to which you are covered and will receive the death benefit. Each year you pay a specified amount, which may or may not increase based on your specific policy. Basically, once the term is up, you are no longer covered and must find a new policy for yourself. Unfortunately, there are no tax advantages associated with term life insurance for the policyholder.


Whole Life – This type of life insurance essentially covers you for the rest of your life, so long as you continue paying the premiums. This permanence is what separates whole life from term life insurance. However, it should be noted that whole life insurance tends to be more complex than term life. Part of this has to do with the fact that whole life insurance policies accumulate a cash value that grows each year at a pre-determined rate. Essentially, a portion of your premium goes towards this cash value. However, another small portion of your premium goes towards the administrative fees of servicing that cash value. Both of these tend to cause the premiums to be more expensive than with a term life policy. But wait, you’ll see all of the tax advantages associated with this type of life insurance.


Universal Life – Another type of permanent life insurance is called universal life insurance. It is arguably even more complicated than whole life insurance. This could in part be due to the fact that universal life offers you even greater flexibility than whole life. Specifically, you are allowed to fluctuate the value of the death benefit, as well as the policy’s cash value – even after you take the policy out initially. On the note of the cash value, it grows based on the insurance company’s investment portfolio. However, universal life insurance premiums can end up costing even more than whole life. Again though, there are great tax advantages to be realized.


Variable Life – This is another type of permanent life insurance that also has a cash value component. Just like whole and universal, variable is much more expensive than term life. This type of life insurance has premiums at a fixed level, as well as a flexible death benefit. In this case, you can select what you invest the cash value of your policy in.


So what are the tax advantages?


Now that we’ve introduced four major types of life insurance – term, whole, universal and variable life. You may notice that the latter three options are all forms of permanent coverage, whereas term life is not permanent. As it turns out, all of the permanent types of life insurance are the ones that offer you tax advantages. Consider the following:


  • Savings component grows tax-free: Policies may differ, but the cash value of your policy grows tax-free until withdrawn. Though in some cases, it may be entirely tax free.
  • Contribute with pre-tax dollars: If you set it up right, you are able to contribute to your policy premiums using pre-tax dollars.
  • Beneficiary receives death benefit tax-free: So long as you took the policy out in your own name, then your beneficiary will receive the death benefit tax-free.
  • Doesn’t affect other contribution limits: Paying your life insurance premiums have no effect on your other tax-sensitive investment contribution limits.
  • Pay premiums with pre-tax dollars: In some cases, if the cash value of your policy grows enough, you can use it to pay your premiums. Thus, if you are contributing to your policy with pre-tax dollars already, then you’re good to go.

So now we’ve discussed more than just whole life and term life insurance – you’ve gotten a chance to learn more about other types of permanent life insurance too. Now it’s time to reflect on your tax situation to see if there’s savings to be realized through life insurance policies. Be sure to learn all the ways Elite Legacy Education can help you reach your goals.

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