Paying Taxes on Policy Income

A major benefit of a whole life insurance policy is the ability to accumulate money in your cash value account, which is especially valuable for people such as new college grads. The face value of a permanent life insurance policy is the amount that your beneficiaries will receive upon your death. The cash value is the money that you put into your account as a form of savings, investment or loan backing. While you cannot use the face value while you are still alive (unless you reach the senior age of 100), you can use the cash value for different things. People also like having a whole life insurance policy because they can accumulate wealth tax-deferred.

Paying Cash Value Taxes

The cash value is a type of security for your life insurance policy. You add money to it every year as part of the premium. The cash value accumulates interest over time, which is guaranteed. It also earns non-guaranteed dividends, which depend on how well the insurance company is doing financially. You do not have to pay taxes on the interest that builds in this account. As long as you pay the premium every month, your cash value is safe. While you may not use the premiums as a tax deduction, the interest earned in your policy is also not taxed. In this way, a life insurance policy is a tax shelter like a 401(k).

Death Benefit Tax Rules

When your beneficiaries receive the death benefit, they will not have to pay taxes on it. The only way you would be taxed is if they get more money than what is stipulated by the death benefit. For example, if the policy is for $100,000 and your family gets $160,000, only $60,000 is taxed by the government. Another action that would cause taxation is if you cancel your life insurance policy and take out your cash value.

Borrowing against Cash Value

The policy owner is allowed to borrow against his cash value. This means you can get loans from different banks by showing them the money in your life insurance policy. You may have to wait a few years to tap into the money in your cash value, however. It takes time to build enough value to borrow against it for loans. Of course, you have to pay this money back. You may or may not have to pay interest on this money. However, if you take out money from your cash value and do not repay the amount back, it can cancel your life insurance policy. If this happens, the cash value is now considered income and liable to taxation.

Lifetime Insurance Policy

A whole life insurance policy is never ending - it covers you for life and beyond. It provides money for your family, who depends on your income for survival. It provides security after death and even during life, because you can use your cash value to pay for things now. Sheltering your income in a life insurance policy can work if you follow the rules of the insurance company. It could cost you a significant amount if you cancel your policy, or you could earn a lot of money if you play by the rules. If you have not yet signed up for a whole life insurance policy, get free quotes now from various companies. They will give you rates based on your lifestyle and needs. You can compare the features of different policies with the rates and then make your decision. Consult a tax expert if you have further questions about how to avoid taxes in your whole life insurance policy.