Taxes On Life Insurance

There are usually not taxes on life insurance, however there are always exceptions to the rule. For example, if the estate in question is more than $2 million there may be estate taxes. In order to protect beneficiaries from unwanted tax costs the policy holder should arrange for their policy to be transferred to their beneficiaries using a trust fund. Because there are strict IRS rules regarding this type of transaction a Certified Financial Planner should be used to do this. Also, the further ahead of time you arrange this action the better.


For those whose estates do not exceed $2 million, their life insurance is probably not going to be subject to taxation. For this reason, you can use life insurance to accumulate tax-free funds. However you must choose the right kind of insurance policy. Whole life policies are tax free, and sometimes result in dividends. Universal life policies are also tax free and all the money that exceeds your premium is invested, with the returns being applied to the premium or placed in a holding account and built up over time. Your financial planning expert can advise you on these types of investment strategies.

Variable universal life insurance can be an even better investment vehicle than universal life insurance because there are more investment options. You can choose where your money goes, unlike with whole or universal where the insurance company makes the investment decisions. Also, there are a wider range of investment vehicles such as stocks in which you can choose. You should be aware that if the policy holder withdraws cash from their policy, the amount of their premium is not taxed while anything above it would be. For example if you have paid $2000 in premiums and you withdraw a total of $3000 from your insurance investment account only $1000 would be taxable. Your tax bracket also factors in when it comes to taxes on life insurance investment funds.

Because of the possible taxes on life insurance investment money, a wise strategy is to grow your insurance policy account over a long term period by adding money on a regular basis and allowing it to accumulate. Then when you do decide to withdraw cash don't take a large lump sum at once but rather smaller sums to avoid unnecessary taxation. Of course before doing anything it is very important to work closely with a Certified Financial Planner experienced in handling life insurance investments and tax issues.



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