Life Insurance to Reduce Taxes

Life Insurance saving plan

We all know taxes are inescapable, but what you can escape is how much you pay in taxes—through investments. More specifically how you invest can have a major impact on reducing your tax bill. According to Bloomberg, the latest “trend” in tax savings has us taking tips from wealthy business owners.

For quite some time now, the wealthiest amongst us have been using life insurance as an effective way to save their well-deserved dollars from being heavily taxed in life and in death. So much so, that elite financial institutions such as JPMorgan Chase & Co. and Goldman Sachs Group Inc. are now offering “Insurance Dedicated Funds” or IDFs to the wealthy elite.

Amongst the masses, most of us buy life insurance without investment in mind. The simple aim is to financially protect our families. In fact, you can likely recall taking out your first policy with the birth of a child or when you bought your first home. However, fast forward down the road and some of the most interesting and beneficial uses for life insurance are when the nest is empty and paid for. These perks are not just for the wealthy either! There are many ways for the rest of us to get in on the tax-free savings too and we are going to share a few of the most popular ways to do so. Read along as we share how you can use your life insurance to invest in a “tax-sheltered” plan.

CDA your way to tax free fund distribution

Have your assets accumulating inside a holding company? You may be all too familiar with the high taxes involved— especially when it comes to distribution. This is where life insurance can sweep in to save the day. By making your holding company the beneficiary of your life policy, a “capital dividend account” or CDA is created. With a CDA you can use your life insurance to transfer money from your holding company to your shareholders tax free—you heard that right! In some cases, after a while, the whole life insurance policy has a large enough value to ensure sufficient dividend payments that allow a person to live off of it. This is particularly the case in retirement—you can essentially be paid an income through dividends without having to pay any taxes.

Pass along the savings.. to future generations

Timing is key when it comes to tax savings. The longer you wait to plan effectively, the more you will accrue as tax payments while attempting to move assets from yourself to your beneficiaries. What might come in handy is to know that all types of life insurance, and not just whole life insurance, have tax free death benefits. Any beneficiary of your life insurance plan will be transferred your death benefit tax free— no matter how large the sum! While most of us are familiar with the transfer of money through a will, life insurance provides a far more viable solution as it eliminates inheritance taxes. Not to mention any and every taxable portion of a will can and will be taxed, which is not the case with life insurance policies.

Living benefits of life insurance

In need of a loan? It might be imperative to note that loans (of any amount) can be taken out of your life insurance policy tax free so long as it has a cash value. If you have term life insurance, you are out of luck, but that changes completely with whole life and universal life insurance! Although it varies from company to company, most loan around 90% of the cash value of your policy. Even if you need to take out more than the cost basis, the money will continue to be tax free as long as your policy is active.

And in many cases these loans might not require to be repaid. Nor do your beneficiaries get paid what you owe them, if you pass away before your loans are cleared.

The cash advantage

We all know that cash is king. And having a life insurance policy might be the easiest way to leave your beneficiaries and yourself with more of it.

Fun fact: many use their life insurance policy as a way to accumulate assets with a high rate of return after taxes. While you watch your assets grow and prosper tax free, you can borrow against your policy to access assets in the form of cash…which is far more tax friendly.

The cash value of the policy can also be used by your beneficiaries, when you pass away to clear your tax liabilities and funeral costs. In addition, if there are any foreign taxes to be paid on your part, the policy money can cover those too, leaving your loved ones only grieving for your loss.



Laura D’Angelo | The Edge Blog


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