Defining Life Insurance for Taxation Purposes
Defining Life Insurance for Taxation Purposes
Life insurance is not only a great idea for future planning. It is not only a great idea for investment purposes. It is one of the best ways to shelter yourself from taxes. The money inside a life insurance policy is not taxable. Even if you use the money inside the policy to invest, you will not have to pay taxes on it. You will not have to pay taxes on the returns you get either, as long as they stay inside the policy. Dividends earned, returns made, and loans that come out of the insurance are not taxable inside the policy.
Dividends are offered on some types of life policies. Many allow you to stipulate how you want to use those dividends. You can get them as a check in the mail. You can set up your policy to use dividends to go toward your premiums or toward supplemental insurance. You can get dividends to be added to any investing that is going on within your policy. As long as the dividends stay inside the policy, they are not taxable. You are not required to report these dividends as income as long as they are sheltered inside the policy.
Returns on your investments made as a part of a life insurance policy are not taxable either, if they stay inside the policy. Many types of life insurance include investing. Permanent life coverage such as universal life, variable life, etc, all include in the premium some money that will be invested. In some cases you can delineate where and how you want that money invested. In other cases the insurance company will handle the investing for you. Some policies will involve higher risk investing than others. There is the possibility of making large sums of money. If you want that money to be tax free, keep it in the life insurance policy. It can be used in all the same ways as dividends within the policy.
Taking money out of a life insurance policy is considered a loan against the policy. Loans are not taxable. The trick is that these loans are not necessarily traditional loans in that they do not have to be paid back. When they are not paid back the sum is taken out of the death benefit. Life insurance loans are a great way to get some money that is free of tax and not included in your income.
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