Are There Tax Benefits Associated With Life Insurance?
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Asked October 14, 2011
Life insurance is available in two primary forms, term life and whole life. Term life policies are issued for a specified length of time, after which they can be canceled, extended, or sometimes converted to a whole life policy. Term life insurance does not generally include any tax benefits, but it is less expensive than whole life insurance. The one tax benefit of term insurance, and a benefit that is valid for all life insurance, is that the settlement, when paid, is generally tax exempt.
Whole life, also called permanent or universal life insurance, is meant to be effective for the lifetime of the policyholder as long as the premiums are kept up to date. Among the benefits of whole life insurance is the usefulness of the policy as a financial tool, allowing the policyholder to borrow against the accumulated cash value of the policy without being penalized or taxed. Essentially, the cash amount paid into the account is considered money that belongs to you anyway, and borrowing against that amount will reduce the payout value of the policy but will not result in being taxed because you are simply utilizing money that already belongs to you, the policyholder.
Whole life policies offer other advantages as well, such as the ability to choose how the money is invested for the long term. And if you do borrow against the policy, you only need to repay the "loan" amount, without being charged interest on the money the way you would be if you had applied for the same loan through a banking institution. Permanent life insurance policies are a lot more flexible than a term life policy, but the premiums are usually a little more expensive.
There is also a third type of life insurance policy, a funeral expense policy, that is intended only to pay for a person's final expenses such as the funeral and burial plot. This type of insurance is typically priced similar to a term life policy, but it is effective for the duration of the policy holder's life. Funeral expense insurance does not carry any of the tax benefits associated with whole life insurance aside from the settlement being exempt from estate and other taxes.
Answered October 14, 2011 by Anonymous