Life insurance policy buyers can now choose between whole life insurance and term life insurance. Before the introduction of TEFRA, buying whole life insurance policies was commonplace. The scenario changed after TEFRA’s introduction, and offered term life insurance leverage.
Why whole life insurance?
Many still prefer the old school whole life insurance. It has many benefits. One of them is it helps the consumers to cut down on the tax bill. Buying a permanent life insurance policy means your taxes will reduce during your lifetime, and also after you die.
That being said, lowering the taxes requires some planning. In this article, I am going to discuss it in details.
Tax free cash-buildup
Signing up for permanent life insurance implies you’d be paying a fixed monthly/annual amount as premiums. A portion of the money that you are paying as premiums goes into a savings account. As the money keeps getting deposited into the account, a cumulative interest rate generates. This way, a pile of cash gets built up in the account.
As the money piles up tax-free, the account ends up having an immense amount in it. The only catch is, you can’t withdraw the money because if you do, then it’d be taxed. Many people don’t withdraw the money, they let it grow thinking in the event of their death, their family members will receive it tax-free.
Benefits of tax-free account
No matter what experts claim, the US economy hasn’t quite recovered from the impacts of the recession. The mounting amount of national debt (currently clocked at $21 trillion), the increasing federal deficit, and the long-term crisis in the healthcare sector all contributed to the apparently grim future of the social security vertical.
To put it mildly, you are on your own. And you can’t expect a tax cut. Instead, taxes will rise. Signing up for a whole life insurance is one of the very few options left for you that allow you to save money safely from the tax axe, which grinds down one’s personal savings.
Social security benefits
One important aspect of earning within a whole life insurance is it doesn’t increase the tax that you pay to receive social security benefits. In case you don’t know, you pay income tax to receive up to 85% of the social security benefits.
Aside from that, all the non-taxable income, including municipal bond interest are taken in stride to consider the amount of benefits provided to you. The only exception is the money that grows with the accrual of interest rate within your whole life insurance account. No matter how much cash builds up in your insurance policy account, it won’t increase the amount of tax.
Tax problems solved
You can use your whole life insurance policy to solve tax problems. First of all, rebalancing within the policy is allowed. At the same time, several variations of permanent life insurance opens investment gates in front of you. Investing in bonds, real estates and international stocks are among the options.
A variable universal life insurance policy (VUL) is one such variation. If you sign up for this type, the cash value will grow depending on your underlying portfolio’s performance. When your total investment portfolio absorbs the underlying portfolio, reallocation takes place within the policy. But since it is not taxable, your profits remain untouched.
You can max out your permanent life insurance without fearing a tax cut. The problem is, when you withdraw the money, a tax will apply to it. There’s a solution, however, which whole life insurance policies offer. The solution is taking a loan. The money you borrow is from your cash value, and thus, will not be taxed. If you are sure that your income wile l increase in the upcoming years, then sign up for a whole life insurance policy because the state tax will increase, and the life insurance policy could function like shelter from tax.
Alongside the advantages, permanent life insurance policies consist of a few disadvantages. Such a policy can be expensive. The difference between a term life insurance policy and a whole life insurance policy can be more than $3000 a year. If you make $30000 a year, then the premiums eat away 10% of your earning. Besides, there are other investment schemes that let you avoid tax. Such schemes include Roth IRAs, 401(K) plans, etc.
But despite the disadvantages, people still invest in whole life insurance policies because the policies secure their future, and shelter their savings from tax.
What do you think of the article? Would you follow the tips given here? Let us know in the comment section below.
Peter Christopher is a personal finance blogger and author. His passion for helping people to make solid financial decisions motivated him to start his own personal finance blog, where he writes about money management tips and frugality.