When people think of tax reduction strategies, life insurance is not often at the top of their list. It is true that term life insurance does not provide any immediate tax benefits, but permanent life insurance is an entirely different story. There are numerous ways to use a permanent life policy to lower your taxes. Here are 4 of the most effective:
Overflow Retirement Investing
There are maximum allowed annual contribution amounts for retirement accounts. And if you want more of your money to grow for retirement tax-deferred, your options are limited. Permanent life insurance can offer another option to grow your money in a tax-deferred manner. A permanent life policy is more flexible than a traditional retirement account as well. There are no contribution limits, and you do not have to wait until age 59 ½ to withdraw funds without penalty. Another advantage to permanent life insurance is if you do take a withdrawal during retirement, this is one of the few sources of income that does not impact how much you are taxed on your Social Security income.
Tax-Free Reverse Mortgage Strategy
A reverse mortgage is a controversial financial vehicle that has started to become more popular. Commonly used by those who are retired, a reverse mortgage pays guaranteed monthly income that does not need to be paid back until the recipient dies. And since this is technically a loan, the income is tax-free. The one major drawback of course is the mortgage balance that continually accumulates and often forces the heirs to sell the property after their loved one dies. Life insurance can eliminate the downside of this strategy by using a portion of the monthly income to pay premiums on a policy that will pay a tax-free death benefit. This provides tax-free income now, and ensures the balance of the loan is eventually paid.
Estate Planning
There are a number of ways life insurance can be used for estate planning purposes. Among the simplest ways is to reduce the estate value and thus any estate taxes owed. Another thing that can be added is a life policy for the specific purposes of paying all estate taxes when the owner dies. More advanced strategies, such as irrevocable life insurance trusts, are commonly used by individuals with a higher net worth.
Tax-Free Death Benefits
No matter what type of life insurance policy you buy, or what other purpose you use it for, one thing remains constant; death benefits are always tax-free. This is very important for those who want to leave their heirs without the headache of dealing with a major tax bill. For more tax reduction strategies and additional information on how life insurance can help reduce your tax bill, speak to your local tax professional.