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When you add to the benefits package for a company, you might not immediately think of cash value life insurance as an option, but it can provide a wise choice for your clients. Find out whether cash value life insurance is taxable so you can save money on next year’s tax return.

As Insurance

As an insurance policy, cash value life insurance falls into the category of permanent life insurance. A portion of its premiums go into an account to build the cash value, while the other portion pays for the policy. Unlike term insurance, it does not terminate. Its death benefit exists from the moment of policy purchase. Its cash value accrues over time.

As An Accumulation Tool

A cash value policy also provides your clients with an important cash accumulation tool. The cash value portion becomes a nest egg against which they can borrow money. More importantly, it becomes a tax deferred nest egg. Your clients only pay any taxes when/if they surrender the policy (to the extent there is gain). However, there are ways to withdraw money that incur no taxes. Also, as a death benefit, a cash value policy pays the beneficiary money that is not subject to income tax, without taxing the money.

Mostly Non-Taxable

According to the Internal Revenue Service, life insurance typically is not taxable when it:

  • builds value over time
  • is a permanent life insurance policy

The cash value build up in a life insurance policy is tax deferred. You can access the money tax free by taking withdrawals and/or policy loans provided it is structured properly. 

They can also obtain payout for a terminally ill insured individual covered by the policy. In some cases, they can obtain this early payout for chronic illness, too.

All of these situations are excluded from gross income and non-taxable. They also do not incur capital gains taxes.

When It Incurs Taxes

If you structure a policy as a Modified Endowment contract, then income received would be considered taxable. Also, if you fully surrender a life insurance policy, this would trigger tax on the value over and above your cost basis.

A death benefit incurs taxes when the beneficiary takes it in installments instead of as a lump sum payout. The interest that accrues on the installment payments incurs taxes. The benefit payment itself does not get taxed, just the interest.

Another scenario under which the payout incurs taxes includes high value estates valued at more than $11.4 million. Every individual receiving proceeds from an estate, except the spouse, incurs taxes (estate tax) on the payouts. The 2019 Federal Estate Tax Exclusion individual amount is $11.4 million. Any estate with a value greater than that incurs a 40 percent tax rate. This tax can be avoided by proper planning.

Learn More from Advisor's Resource

You can find out more about cash value life insurance and how to obtain this useful coverage for your clients by contacting our insurance brokers at Advisor’s Resource Company. We can help you design a benefits package for your clients that offers them dual value as insurance and investments. Call us at 972-338-9655 and get started today.

Jordan Pence
Post by Jordan Pence
October 24, 2019