Minimizing Taxes
At Blazing Star, we encourage those that are interested to move forward so they get the best of what the industry has to offer. We also encourage a level of proactiveness because qualifying for life insurance and the costs of the insurance are based on age, health and risk factors. Let’s take a closer look at the tax codes that demonstrate the multiple tax advantages of using cash value life insurance while living:
72(e)
Cash value of a life insurance policy grows tax-free regardless if the earnings are from interest or dividend credits. This introduces the idea of using a life insurance policy while living.
7702
A cash value life insurance policy has both a cash value and an account value. This is an important distinction. 7702 reinforces that the cash value of the policy can be accessed through the policy loan provision without paying taxes. A policy loan is like an advance on the policy without devaluing the account value. The account value is the earnings generating mechanism that can continue to earn interest even if there is an outstanding policy loan.
101(a)
Refers to the death benefit. In short, this code states that the death benefit paid from a life insurance policy to the beneficiaries is generally excluded from the recipient’s gross income. That means the check from the life insurance carrier to the beneficiaries is not seen as income and is not taxed.
Now that we’ve addressed how utilizing cash value life insurance fit within the guidelines of the tax codes, here is what the codes are saying that makes this a tax advantage financial tool:
1 / The Account Value
A life insurance policy grows based on premium going into the policy and the interest or dividends that it earns. Life insurance policies also grow cash value that mimics the account value. Accessing the cash value of the policy through a policy loan allows the owner to access the earnings of the policy without being taxed. No other financial tool can bypass paying taxes on interest earned. Ever.
2 / A Roth IRA
Has similar tax advantages to how a cash value life insurance policy can be used. However, it is also capped on annual contributions and still subject to market volatility. For those reasons, compared to a Roth IRA, cash value life insurance—like an IUL—has more versatility and overall, more advantages. You also have to wait until you are 59 1/2 and have the Roth more than 5 years to access growth tax free.
3 / Funds
Technically, cash value goes in a life insurance policy tax deferred. However, when accessed through the loan provision the funds aren’t seen as income. Therefore, the carrier will not issue any statement that is required to be included on a tax return. Not only is it not taxed. It cannot affect the policy owners tax bracket. Funds withdrawn outside of the loan provision are subject to tax.
3 / Your Portfolio is Diversifying
Combining the knowledge from the tax codes and the other products available in the market place, shifting the portfolio to include more cash value life insurance provides multiple layers of tax advantages.
