Life Insurance is a Valuable Tool in Tax and Estate Planning


You can use life insurance with financial planning to offset taxes on inheritances and cover other fees after death. Because life insurance provides an immediate, untaxed payout, it is easier for heirs to leverage these funds to handle costs immediately following the death of the insured. It’s understandable if your life insurance policy is not top of mind for you. But did you know that, aside from paying your beneficiaries money upon your death, there are benefits worth exploring. As you look ahead to retirement, it’s worth exploring how your policy can be utilized as a source of income in retirement to help maintain your lifestyle.

Here are some reasons why.

  • Provides liquidity when it’s needed. If you’re primarily invested in real estate, a private company, or other illiquid assets, where’s the cash going to come from to pay taxes owing when you’re gone? Life insurance can solve that problem.
  • Shelters investments from tax. If you invest in a permanent (not term) life insurance policy, then a portion of your premiums will go into an accumulating pool of investments. Those investments will grow tax-sheltered, which can allow for greater accumulation over time.
  • Transfers assets tax-free. When life insurance pays out upon your death, both the face value of the policy and the accumulating investments are paid tax-free to your beneficiaries. If you grow those investments outside an insurance policy, the growth will be taxed upon your death (when someone other than your spouse inherits the assets). So, life insurance can eliminate that tax.
  • Leaves a legacy of value. Some of my clients have purchased life insurance on the lives for their children – because it’s cheaper than for their own lives. Once the kids are 18 or older, they can transfer ownership of those policies – including the assets in the policy and all the growth – to their kids, free of tax. The beneficiary of the policy can be the grandkids. This provides a tax-free legacy for future generations.
  • Provides cash in retirement. You don’t have to die for the benefits of life insurance to be realized. As you grow tax-sheltered investments inside a policy, they can be used to provide cash in retirement. You can make direct withdrawals from the policy (which are taxable), or you can borrow against the value accumulated in the policy. These loans can be used to meet cash needs in retirement, and are paid off using some of the insurance proceeds when you’re gone.
  • Ensures the continuity of your business. If you own a business that would be greatly affected by your death, give your employees, management, and family an opportunity to see the business thrive even in your absence. Life insurance can provide a cash infusion that could help stabilize the business.
  • Enables tax-free withdrawals from your corporation. If your company owns and is the beneficiary of a life insurance policy on your life, your company will receive a tax-free payment when you die. These proceeds will increase something called the “capital dividend account” of the company, which will allow for tax-free dividends to the surviving shareholders.

Written By: Shawn Ryan

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