Did you know there is a way you can access money without paying taxes on the benefit? It is completely legal; we are not avoiding any laws here. But tapping into the cash value of a permanent life insurance policy will help you to boost your income during retirement, but not boost your tax bill. There are multiple other ways as well to keep your income high, but your tax bill low. Talk with an accountant in Billings, Montana, if you want to learn about some of the other ways to do so.
How Permanent Life Insurance Works
There are two basic types of life insurance: term and permanent. Term insurance will provide a death benefit as long as you are up-to-date on your premiums, and you die within the term specified. Permanent, on the other hand, will provide a death benefit as long as you are up-to-date on your premiums no matter when you die. But that’s not all.
Permanent insurance is a unique financial tool because it not only gives you the death benefit, but also has cash value. This cash value is like a little side fund where your money can grow, tax free, until you withdraw it or you die (if you die you don’t get both the death benefit and the cash value, but rather just the death benefit). That cash value can be tapped into at any point, but there are ways to get at it without taxes.
Using the Cash Value of Permanent Life Insurance
Suppose you own a house, and you want to utilize the equity that you have built up. Would you sell off a portion of the house? Or would you use a home equity loan? If you have a house with a lot of land, you may consider selling off a few acres from the back of the lot, but for the most part people will take out a loan. Using the cash value from your permanent insurance will work the same way.
Instead of cashing in your insurance, which would leave you with a lower death benefit, most people choose to take a loan against the cash value. They can utilize the cash, and not have to worry about losing their insurance. Even better, though, is that since it is a loan, there are no taxes that are owed on the money.
Repaying the loan can be done in a few different ways. Many people choose to repay it slowly, a few hundred dollars each month or year, but some choose a different method. Since the death benefit is still intact, and if the loan isn’t too big to risk the policy running out of cash, some people do not even bother paying off the loan. They simply wait until they die, and then the death benefit (a benefit that is almost never taxable) will repay the loan and the remainder will go to the beneficiaries.
Maximizing Your Retirement Income
Retirement takes planning. There is no way to get around that. By starting early, and setting up a Roth IRA, getting permanent insurance, relying a little bit on Social Security, and having a 401k, you can set up your retirement so that there are minimal taxes, but considerable income. If you are approaching (or in) retirement, talk with Practical Taxes to determine your best course of action.
Practical Taxes is a full service accounting firm. We can do payroll, tax preparation, business planning, online payroll, and much more.