Does a Life Insurance Policy have Tax Benefits?

Answer:
Life insurance policies that accumulate a cash value do have tax benefits and

all life insurance policies have tax implications.

A life insurance policy that accumulates a cash value usually earns interest in one form or another. As the cash value grows and remains untouched, the interest grows on a tax-deferred basis.

When you withdraw the cash value, such as by surrendering the policy, the earnings will be taxed. For example, if you have a life insurance policy that has a cash value component, part of the premiums will go toward building the cash value.

Since you have already paid income taxes on the money used to pay the premiums, that portion will not be taxed however the interest that has accumulated will. Tax deferral is a benefit because it allows more of the interest to remain in the account which in turn earns more interest.

Your savings will grow much faster than if you had to pay the taxes each year. No matter what type of policy you have, the death benefit will have tax implications when you die. For many people, the benefit is tax free. However, if your estate is large enough, estate taxes may kick in. Legislation is pending to remove estate taxes from life insurance in 2010.


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