Having life insurance isn't just about planning for support of surviving family members and loved ones. It's also about building up your savings and can help you to avoid paying more than you have to in taxes.
The following are six ways that your life insurance can help you to minimize your tax liabilities.
You can defer the payment of taxes on any growth in your policy's cash value.
Over time, your life insurance will accrue interest and grow in value. You don't have to pay any taxes on this increase in value each year as growth occurs.
This means that your life-insurance policy can increase your net worth each and every year without requiring you to pay more in taxes. Other investments you make that could grow your net worth will need to be reported on your tax return and will add to your annual tax liability.
It's likely that the dividends you receive on your life insurance will not be taxable.
Depending on your particular life-insurance policy, you may be provided with dividends tax free each year. A good way to make it so that you don't have to pay tax on dividends is to use any dividends you get to pay the premiums on your policy.
If you make a payment using your life-insurance policy to a spouse, you probably won't have to pay any taxes on that money.
If you're married, a life-insurance policy is a good way to transfer funds to your spouse. You can make payments to your spouse that will be free of both estate taxes and income taxes.
When your death benefit is provided to your beneficiaries, they won't have to pay any tax on it.
Of course, the biggest reason many people take out life-insurance policies is so that a death benefit will be paid to their benefactor or benefactors when they die. This death benefit is not taxable and won't increase your benefactors' tax liability.
You may be able to make cash withdrawals from your policy that will not be taxable.
A life-insurance policy can be a convenient financial backup if it so happens that you need some added funds in a particular year. If you make a withdrawal from your policy because you need some cash, your withdrawal will probably be tax free depending on how much you withdraw.
Loans that you take out on your policy will not be taxable.
If you need some additional cash, you can take a loan out on your policy. This is a good option because you'll pay back the loan so that over the long run it won't detract from the value of your policy. The loan you take out will not be taxable.