Tax Advantages of Life Insurance

TAX ADVANTAGES OF LIFE INSURANCE

As the foregoing example illustrates, the utility of life insurance stems both from the "double return" character of lifeinsurance itself and its relatively "tax-sheltered" position.

The return on life insurance is twofold. First, there is an investment return, represented by tax-free accumulation of interest on the going cash value. Secondly, there is a tax-free mortality return, that is, the ultimate proceeds paid out at death almost invariably represent a gain over the total premiums paid in. In addition to these income tax advantages we have seen that where the insurance policy is owned by a member of the insured's family, or by a trust or by a corporation, the proceeds which are paid at the death of the insured are not subject to the estate tax.

As will be further considered, these tax advantages of life insurance can be compounded by careful planning. Suchmeasures, similar to the following, should be considered:

1.      The use of tax-protected income dollars to carry life insurance. Trust income which is tax-protected as far as the individual is concerned, and corporate dollars which otherwise might be declarable as dividends payable from the profits of the corporation, can be utilized for the payment of premiums.

2.      Carrying life insurance by borrowing against cash value to pay premiums, and paying out only a pure insurance cost plus interest dollars that under today's law are tax deductible.

3.      Guaranteeing the replacement of capital dollars spent today by tax-free life insurance proceeds to materialize at death. The family may be protected more effectively, for example, by funding charitable gifts made during the donor's lifetime, such funding being accomplished with a life insurance policy on the donor, the ownership of which is in some one other than the insured-donor. At death, the insurance covers what was given away, but is not subject to estate tax, since the deceased was not the owner of the life insurance. In this way, annual tax deductions may be claimed for the gifts, but the entire value of the gifts will be realized and recouped by the family at the death of the insured-donor.