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Tax-Free Life Insurance

Tax-Free Life Insurance

The main objective of a life insurance policy is to provide protection to the family of the insured in the event of his/her death. Tax savings is another benefit that one gets through life insurance policy. One can get the tax-free benefits from policies that make cash value against excess premium paid by the insured that are invested.

Tax-Free Borrowing

Cash values mature on tax-deferred basis. This option is specifically useful for varying needs like college savings and purchasing a home. Through this option, one will be able to borrow a loan amount up to ninety percent of the tax-free cash value without terminating the terms of the policy. The condition is that one needs to payback his/her loan with interest. Sometimes it may happen that one fails to repay the loan before death. In that case, the outstanding amount is subtracted from the death benefit.

Other important rules of a Life Insurance Policy

In the event one needs to cancel his/her existing policy, the equivalent cash value will be paid to the insured. The insured will be liable to income tax for the amount that exceeds the premiums he/she has paid.

The other important thing is that if the insured have previously borrowed a loan that has not yet been repaid, he/she will get a reduced cash surrender value at the time of giving up the policy. Some other important rules include:

  • The insured needs to inform the insurance company, if he/she wants to surrender
  • The existing insured is allowed to gift the new owner(s) up to a sum of $12,000 per individual per year. In that case, the previous owner will no longer be able to make any alterations to the policy. The change of ownership can be possible only if one gets written confirmation from the insurer.

About Death Benefit

After the death of the insured, death benefit is offered to the beneficiaries and it is tax-free. If an insured owns an estate that costs more than $2 million, then it will be subject to estate taxes.

Estate planning through life insurance

Estate planning through life insurance is recommended to those, who own assets that value over $2 million. Proper estate planning through life insurance policy will definitely save the insured from hefty estate tax.


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