Reduce your tax bill with permanent life insurance

Permanent life insurance allows you to build up cash value that you can access tax-free while you’re alive and then create an income-tax-free legacy for your loved ones after you die. Within specified limits, you can make withdrawals of up to while the policy is current. You can also borrow against the policy value. Although permanent life insurance is not tax deductible, the cash value grows tax-deferred.

Key recommendations

Life insurance allows you to transfer a death benefit to your beneficiaries tax-free.
While estate taxes can apply to life insurance, there are strategies to avoid these taxes.
Permanent life insurance also generates cash value that you can use while you are alive.
The cash value grows tax-free during your policy.
If you withdraw the cash value, you owe income tax on the earnings. However, loans allow you to access the money tax-free.

Your beneficiaries

When people think of life insurancethey generally imagine how they will help those they leave behind. If you pass away, the death benefit can pay for a child’s future college education, provide a retirement fund for your spouse, or simply make sure your survivors have money to live the lifestyle you want for them .

Life insurance death benefit is completely exempt from income tax for the beneficiaries. No matter how large the death benefit is—$50,000 or $50 million—your beneficiaries won’t pay a single cent of income tax on the money they receive.

This is not true for most other financial accounts. For example, beneficiaries can be hit by Internal Revenue Service (IRS) when they inherit individual retirement accounts (IRAs), tax-deferred annuitiesand qualified retirement plans. Life insurance creates a more tax-efficient legacy.

Important

Estate taxes could apply to life insurance death benefits. However, the property tax exemption is nearly $14 million for fiscal year 2025, so this would not apply in most cases.

Tax benefits on the cash value

Permanent life insurance it can build cash value, a reserve of money that you can access in life. You could use this money to supplement your retirement income, pay for healthcare, or use as an emergency fund. The cash value increases deferred tax. You don’t owe income tax as long as the money stays in your policy.

You can withdraw up to your premium payments tax-free. If you withdraw more than that, you owe income tax on your earnings in excess of what you paid. However, you can also access the cash value through a loan. If you borrow it this way, you don’t owe income tax on your earnings. This can keep you in a lower tax bracket in retirement and prevent your Social Security taxes.

You never have to pay off the loan in your lifetime. If you die with an outstanding loan, the death benefit pays it even then your heirs get the rest without income tax. The downside of a cash value loan is that the insurer will charge interest. If the size of your loan plus interest exceeds the total cash value, you should pay more into the policy or you will interval.

Tax benefits for life investments

Asset allocation

There are several versions of permanent life insurance. Some such as universal life (UL), pay a fixed interest rate on the policy cash. Others, however, such as variable universal life (VUL), offers dozens of investment options. These may include a with large lid stock fund, year international stock fundA bond fundor even a real estate fund. The list is almost endless.

Increase in cash value in VUL is determined by the performance of the underlying portfolios you choose. This becomes part of your total investment portfolio. Reallocations within the policy are not taxable. So when the time comes to rebalancing your investments, you won’t have to worry about paying income tax on the profits you make as you make changes to your VUL. Your investments also grow tax-deferred, just like any other cash value option.

Maximized retirement plans

If you have already contributed the maximum amount to your 401(k) and scott this year, permanent life insurance can help you save more. There are no restrictions on how much you can put into permanent life insurance. It’s another way to access tax-deferred growth after you’ve exhausted your retirement plans.

In addition, there are no income restrictions on using permanent life insurance as there are with a Roth IRA. You can use this tax-deferred investment strategy no matter how much you earn.

Strategies for Death Benefit Taxes

Give it now

If you’d like to see your money working for your heirs while you’re alive, as well as increasing the amount they’ll receive when you die, then you might want to consider giving them cash today. For the greatest benefit, your heirs can use a portion of the gift to purchase a life insurance policy on your life. In the meantime, you’ll be able to watch your loved ones enjoy the rest of the money — right now.

Plus, you’ll cut back taxable wealth with the value of your gift. And because your loved ones are the owners and beneficiaries of the policy, they won’t have to worry about estate or death benefit taxes when you die. They also won’t have to worry about paying income taxes on the cash value growth of their life insurance as long as they keep it in the policy.

Irrevocable Life Insurance Trusts

Another option for higher net worth individuals is an irrevocable life insurance trust (ILIT) that directly purchases the insurance policy to exclude it from the personal patrimony. Make an ILIT cash gift to purchase a permanent survivorship life insurance policy. ILIT is the owner and beneficiary of politics. When the survivor dies, your heirs will not have to pay estate taxes and income taxes on the death benefits.

Is permanent life insurance tax deductible?

Permanent life insurance is not tax deductible if you buy a policy for yourself or another family member. However, a business owner could deduct the cost of premiums to pay for employee life insurance. Most people don’t get a tax break when they pay for life insurance, however.

How Can I Use Whole Life to Avoid Taxes?

Whole life insurance can avoid taxes by building cash value. Your cash value savings grow tax-deferred, so you owe no income tax as long as you leave the money in the account. In comparison, if you saved through a savings account or bank certificate of deposit, you would owe tax on the interest each year. If you borrow the cash value of your whole life insurance through a loan, you can take the money without owing any taxes.

Is permanent life insurance tax free?

Permanent life insurance is mostly tax-free. When you die, your heirs owe no income tax on the death benefit. Property taxes apply, but the cap is so high that few people owe the tax. Permanent life insurance also grows tax-free. You only owe income tax if you withdraw or cancel their policy.

conclusion

If income and property taxes are keeping you up at night, life insurance could be the answer. Permanent life insurance is one of the most powerful tax planning tools you can find. It offers several unique ways to approach your estate tax and income fiscal obligations both while you are alive and for your heirs after you die.