The Tax Advantages of Owning Life Insurance

In addition to life insurance proceeds providing a financial cushion to loved ones who are left behind, there are also a number of advantageous tax benefits that go along with owning certain types of life insurance plans. In fact, life insurance policies actually hold a unique tax advantaged status among financial products.

How Interest On Life Insurance Cash Value Is Handled

One of the biggest tax-related benefits to owning permanent life insurance is that there is no income tax on interest or other earnings that are accumulated in the cash value component of a permanent life insurance policy. This is because the funds within these types of accounts are allowed to grow on a tax-deferred basis.

There are also no tax consequences if funds from the policy’s cash value component are borrowed. These loans are treated as if they were debts – and they are therefore not considered to be taxable distributions from the cash accumulation of the policy.

An additional benefit here is that these life insurance policy loans are also not required to be repaid. The only consequence is that if the insured passes away with any amount of unpaid loan still left on the policy, that amount will simply be deducted against the total amount of death benefit proceeds received by the insured’s beneficiary(s).

Tax Treatment of Death Benefit Proceeds

In addition to advantageous tax treatment of a life insurance policy’s cash value, death benefit proceeds are also received free of income taxation by the policy’s beneficiary. This can be quite beneficial to the insured’s survivors, as they will know exactly how much money will be received in order to pay off debts of the decedent and other financial obligations that have been earmarked for these particular funds.

Therefore, when determining how much a beneficiary will need, and barring any unforeseen circumstances, a policy with a face amount of $100,000 will actually pay out $100,000 to the named beneficiary of the policy.

Life Insurance and Estate Taxes

There is yet another area in which life insurance can provide tax benefits. This is the payment, reduction, or avoidance of estate taxes. In many ways, life insurance plays an active role in the estate planning process – primarily for its tax advantages. However, in order for this process to work as intended, the life insurance plan must be properly structured.

In doing so, it is important to note that even though life insurance policy proceeds are received income tax free by the beneficiary, these proceeds could be subject to possible estate taxation. Therefore, it is essential to structure the policy in the correct manner.

The U.S. system of estate taxation can potentially impose a tax on the transfer of a decedent’s taxable estate upon death. This tax is typically imposed – regardless of whether the decedent’s assets are transferred through a will, via their state’s laws of intestacy, or otherwise.

Due to such taxes, a decedent’s estate could potentially owe taxes on a large portion of the value of his or her estate. Therefore, when estate taxes are a potential concern, a life insurance policy may be put in place for the purpose of paying such taxes.

When doing so, however, it is important that the insured should not also be the owner of the life insurance policy. This is because if the insured is also the policy owner, the value of the life insurance proceeds could then be included in the estate’s value – and potentially be subject to additional estate taxation.

There is, however, a solution. By moving ownership of the life insurance policy out of the insured’s ownership and into the ownership of a trust, for instance, the value of the policy’s proceeds will not be included in the insured’s total estate – and he or she will therefore not owe taxes on this amount.

Another solution is to have the adult children of the insured – if applicable – act as both owners and beneficiaries of the life insurance policy. By setting it up in this manner, the adult children could essentially “loan” the life insurance proceeds to the decedent’s estate in order to provide the funds that are needed to pay the estate taxes.

Getting Affordable Life Insurance Coverage

Life insurance policy can be a great way to get some additional tax advantages. Regardless of why you’re getting life insurance coverage, it’s important that you get a quality insurance plan at an affordable rate. There are several ways that you can get lower premiums for your plan. Making a few simple lifestyle changes could help save you hundreds of dollars on your plan, which will help you save more money.

The first thing that you should do to save money on your insurance coverage is quit smoking.  If you’re listed as a smoker on your life insurance application, you can expect to pay higher premiums for your plan, which is going to diminish the value of the tax advantages. If you want to maximize those benefits, quitting smoking is one of the best ways that you can do that. In fact, smokers are going to pay around twice as much for coverage versus a person that doesn’t use any form of tobacco. Kicking those cigarettes to the curb could save you thousands of dollars on your coverage.

Another way to save money is to improve your overall health. You can do this through sticking to a healthy diet and getting regular exercise. Both of these are going to help you lose weight, lower your cholesterol, and reduce your risk of being diagnosed with health complication. All of these are going to translate into better premiums from the insurance company, which means more money in your pockets.

The best way to ensure that you’re getting the most affordable plan, regardless of why you’re getting a policy, is to work with an independent insurance agent. Unlike a traditional agent, independent brokers work with dozens of highly rated companies across the nation, which means that they can bring all of the best rates directly to you. Our independent agents can help save you time and money on your insurance coverage.

How Much Coverage Do You Need?

Before you apply for a plan, it’s vital that you determine how much insurance coverage that you’ll need. There are several different factors that you’ll need to consider to ensure that you’re getting enough protection for your loved ones.

The first number that you should crunch is any debts and final expenses that your family would be left with if you were to pass away. The primary goal of your plan is to give your loved ones the money that they need to pay off those bills without draining their bank account. Make sure that your plan is large enough to pay for those debts.

The next number to look at is your annual salary. The second goal of your plan is to give your family the money that they need to replace your paycheck if you were to pass away. If you’re the main income earner in your home, your family will suffer financially if something tragic were to happen to you, but that’s where your life insurance comes in.

The Bottom Line On Life Insurance Benefits

In addition to simply paying out a benefit upon an insured’s death, life insurance policies can also be a primary component of one’s overall financial, retirement, and estate planning strategies.

Life insurance can help you and your loved ones to protect assets, maintain a certain lifestyle, follow through on financial promises, pay off final expenses and other pressing debt obligations, and attain substantial tax related advantages.

We know that finding a perfect life insurance plan can be a long and difficult search, but it doesn’t have to be. Our agents are here to help everything go smoothly for you and help you save money on your coverage. It’s our mission to ensure that you’ve got the best plan to meet your needs. We work with some of the best rated companies across the nation, and we can bring all of the best rates directly to you, without the hassle of calling all of the companies yourself.

You never know what’s going to happen tomorrow, which means that you shouldn’t wait any longer to get the insurance coverage that your family will need. If something tragic were to happen to you, and you didn’t have life insurance, your family would be left with a mountain of debt. It’s never easy to lose a loved one, but being responsible for hundreds of thousands of dollars of debt is going to make the situation a thousand times worse.

If you have any questions about the tax advantages of a life insurance plan or about the various options for insurance coverage, please contact one of our agents today. We would be happy to answer those questions and connect you with the best plan to meet your needs.

Perhaps your concern is something different such as qualifying for insurance with health conditions.  There are life insurance policies with no health exams so don’t let anything stop you from getting the coverage you deserve.

About Jack D. Davis at
About Jack D. Davis at

Jack D DavisBorn and raised in a quiet suburb of Philadelphia, PA, the youngest of nine children, son of two wonderful parents, Jack developed his work ethic early on. While attending West Chester University, he volunteered to join the US Army Reserves for a six-year enlistment. Attending college during the day, working evenings, and fulfilling his military obligation on various weekends, Jack learned the value of hard work and time management. After graduating from college (BS in Business Management), he began working as a sales representative for a Fortune 100 company and honed his marketing skills. In 1985 Jack started his financial planning career as an agent with Mutual Benefit Life.  After Mutual Benefit Life ran into financial difficulties, Jack decided to “go it alone”. His company, “Eagles Soar Enterprises, LLC.” successfully grew for almost 30 years. Jack’s skill-set is understanding and recognizing the personal needs of families and business owners. His patience in explaining the numerous options available is greatly appreciated by his clients. Jack agrees that life insurance is a difficult topic and people are rarely “excited” about discussing the subject. When Jack was 23 he witnessed firsthand how important life insurance is when he lost his Dad to cancer. Jack’s Mom used the life insurance proceeds to help minimize the financial loss.  Jack recognizes how critically important proper insurance planning is to the surviving spouse, business partner and, most importantly, the children of his clients. In his free time Jack enjoys playing tennis, horseshoes, ping pong, exercising, reading and attending Philadelphia Eagles football games. Jack has two wonderful children and currently resides in beautiful St. Petersburg, FL. Questions? Call Jack at 1.800.277.3098 or email:

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