Whole life insurance is a tax haven? Insurance Pro Blog

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When you read or hear the word tax shelter, it probably doesn’t enchant images of whole life insurance use. But whether the whole life is actually a tax haven depends on how you define it more than anything else.

It’s not a tax haven in the more shady way people discuss tax shelters. But it certainly fits in with something like a TSA (tax-shelled annuity) in a more general sense.

If you spend more than a few minutes traveling on your old World Wide Web, you can find all kinds of interesting “information” about different tax havens. Since this site focuses on the use of life insurance, in particular, there is a lot of time and words written about whole life insurance, so I will look at how whole life works as a tax haven.

Is lifetime premium tax-exempt?

The first thing to address is the house elephant. The most common question I’ve asked myself over the last two decades as a life insurance broker has been “Is my premium taxable for this entire policy?”

The short answer is no, they are not tax-exempt. Your entire life insurance premium is paid with after-tax dollars. To many people, especially those who own a business, this is a frustrating answer. I understand, I own a business, in reality quite a few, and paying my life insurance premium as a tax-exempt expense is definitely appealing. Being able to reduce taxable income by deducting reasonable and customary expenses from total income is a great advantage of owning a business.

But the IRS has decided and has clearly written in many rules and as part of the IRC that life insurance premiums do not fit the bill as a reasonable or customary expense when running a business.

An exception to this rule is that a full life insurance policy may be part of a worthy plan. This means that technically your entire life insurance policy premium can, in this case, be paid with pre-tax dollars. How and why someone would do it is a long and complicated discussion. Usually when this is done, it is done as part of a defined benefit pension plan.

And yes, potentially tax-saving, these plans are quite complex and expensive to set up and manage (think over $ 20k to get started and over k 10k per year for administration). Needless to say, they are not a good idea, just that most businesses will struggle to justify the cost of setting up such a plan, even though they may exist and work well for the right situation.

The ability to defer long-term taxes and policy loans

The real-world application of whole life insurance as an effective tax shelter for 99% of the population is to finance the policy with post-tax dollars. Just pay taxes, set up your policy to get a budget-friendly (but somewhat extended) premium amount each year and look at it composite.

Of course, I guess you are buying a policy from a company that provides participant whole life insurance that has a long history of paying dividends to policyholders. Most good policies are issued by companies that have been doing and doing well for over a hundred years.

And your policy is properly designed to increase the amount of cash value growth over the next few decades. This means you are usually working with a suitable life insurance broker.

I want to believe that we fit that description, our clients tell us so. If you want to talk to us, please Go to our contact form here And shoot us a message. We work with clients across the country.

The best return from a great whole life insurance policy comes from compounding the cash value over time. Yes, of course, you can access your cash value almost immediately if you want but this is not our recommendation. In our experience, the best results our clients get is financing the policy and forgetting for a while. It takes a while to properly capitalize on your policy so that it can create self-sustaining momentum for you when you want tax-free income in the next life.

I mentioned this before, but several years ago I met a man whose father was an old life insurance broker. His father’s foresight was decades ago Staff as much money as he can insure the whole life.

Remember that this was before anyone spoke publicly about banking strategies or used whole life insurance as a retirement income tool. Heck, he started it before the internet even existed. And now, he gets over k 200k per year from his policies and it’s all ুক্ত tax-free

All the cash he saved at that time grew without paying any tax on that growth. And now through prudent use of policy loans, he is able to earn a significant retirement income even though he is not taxable. If you’ve heard it for the first time, I understand that it seems a little too good to be true but it’s real and people do it all the time.

Since you are technically borrowing money through a policy loan, the life insurance company is lending you money. They are using the cash value of your deposit as collateral for that loan.

How you get your cash tax-free from your entire policy

The good news is that life insurance companies make it easy to get your money out of your policy on a tax-free basis. To give you a little context here, I am specifically talking about the ability to receive retirement income on a systematic basis from your policy each year.

Most people who fund their whole life look at insurance Creating retirement income Will use a strategy that maximizes sustainable income. Generally speaking, this is done in what we call “withdrawal on basis, then policy borrowing”.

With this strategy, you will first remove cash from your policy based on your total expenses. If you pay মোট 250,000 in total premiums since the policy started, you will withdraw cash up to that number and then you will go into a policy loan.

However, you don’t have to do it that way. You can also avoid withdrawal on a cost basis and rely only on policy loans. Which option is better will depend on your situation and the loan provision of your particular policy which includes the existing loan interest rate and the current policy dividend.

And of course, outside of a systematic income withdrawal plan for your policy, you can take out a policy loan at any time unless Cash value In principle

Many times those who plan to use their policy for retirement income take out a policy loan and repay it several times throughout the year resulting in retirement. We have clients and continue to do so, mostly to pursue other investment or business opportunities. The cash value of all policies is your money, you can use it as you see fit and at any time you choose.

The essence of lifelong tax shelter

Although whole life is not usually used as a tool to shelter income from taxes, it is an effective tool to shelter money that has already been taxed from future taxes. The analogy has been made that it is better to pay tax on your seeds than on your crops.

It is a good idea to pay taxes now (when rates will probably be as low as in our lifetime) and shelter all your cash value from any existing taxes when you retire (when tax rates are unknown). The rate is on time. These factors make whole life insurance an effective tax haven.

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kang digi is a freelance blogger, writer and a little bit web developer.