Is Life Insurance a Sound Investment?
Most people don't look at life insurance from an investment perspective. However, it is becoming a popular option among corporations and trusts because it provides the best after-tax returns compared to other investment vehicles.
The easiest way to see what life insurance can and cannot do is to make a simple comparison with other investment options. Make sure that the comparison is fair and that all costs, including tax effects, are analyzed on a year-to-year basis for both the insurance and the alternative investment. Don't use investments that have completely different risk profiles; your comparison results will not be accurate.
If it is properly structured, life insurance can provide the following tax advantages:
- Your heirs will receive the death benefits tax-free.
- The cash values grow tax-deferred and any withdrawals are tax-free until the cumulative investment (in the contract) is recovered.
- A loan from the policy is not taxed as income.
- The death benefit will pay off any outstanding loan balances income tax-free at the time of death. The death proceeds can even be estate tax-free if the policy is owned by an Irrevocable Trust.
A life insurance program can be customized to meet your individual needs and objectives. If you are after the tax-advantaged cash value accumulation, you can minimize the life insurance benefit. In many cases though, the benefit is the most valuable feature since it immediately creates a capital sum at death that cannot be duplicated by any investment.
If you would like to discuss the tax benefits of a life insurance investment, please contact our office.
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