subject: Tax Advantages of Life Insurance [print this page] 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 aninvestment return, represented by tax-free accumulation of interest on the going cash value. Secondly, there is a tax-freemortality return, that is, the ultimate proceeds paid out atdeath almost invariably represent a gain over the total premiums paid in. In addition to these income tax advantages wehave seen that where the insurance policy is owned by amember of the insured's family, or by a trust or by a corporation, the proceeds which are paid at the death of the insuredare not subject to the estate tax.
As will be further considered, these tax advantages of lifeinsurance 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.
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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 insur
ance 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.
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