Tax benefits can make permanent life insurance (universal, variable, or whole life policies) attractive. Those tax benefits include:
- Tax-advantaged death benefits. In general, the proceeds paid to life insurance beneficiaries are not subject to income tax. That applies to term and permanent policies. (In some cases, life insurance proceeds will be included in your estate and may be subject to estate tax.)
- Tax-advantaged inside buildup. Permanent life insurance policies have an investment account, called the cash value. Investment income that remains in this account usually will not be subject to income tax.
- Tax-advantaged access to cash value. Up to certain limits, you can tap a permanent life insurance policy, via withdrawals and policy loans, without paying income tax. Such access must be approached with care as it can reduce your policy’s death benefit and even trigger income tax, if excessive amounts are borrowed or withdrawn.
The last two benefits (tax-advantaged investment buildup and tax-advantaged access to that accumulation) are unique to permanent life insurance policies.
