Locations in Arizona, Oklahoma, Texas, and Utah

What is Overfunded Life Insurance?

When it comes to overfunded life insurance, there are a lot of questions people have. A few that come to mind may include:

  • Can you overfund life insurance?
  • Is it in your best interest to do so, and what does that mean for your taxes?
  • What are the pros and cons of overfunding your life insurance?

At Trajan Wealth, we can help you decide if overfunding your life insurance policy is the right plan for you. But first, let’s discuss a few questions you may be asking.

What Is Overfunded Life Insurance?

Overfunded life insurance refers to the act of paying more into your life insurance policy than is required. Most life insurance policies require a specific premium monthly, quarterly, or annually to keep the policy active. And almost all permanent life insurance policies have a cash value element to them. By overpaying your required amount, you add more to the inherent cash value of it.

Why Would I Want to Overfund My Life Insurance?

Did you know that typically you can withdraw or borrow money from your policy’s cash value? Overfunding increases the pool of money in your policy you’re eventually able to draw from. More money is always a good thing when it comes to financial health.

Tax advantages are also a great reason to consider an overfunded life insurance. In most cases, you’re not required to pay income tax on interest generated from life insurance! Plus, the IRS doesn’t set a yearly limit on how much you can contribute to a life insurance policy.

However, here is a limit to how much you can put into your individual policy before you assume tax liability. If you exceed that amount, you could trigger a Modified Endowment Contract and lose some favorable tax treatment.

What Should I Keep in Mind When It Comes to Overfunding My Life Insurance?

Each life insurance policy has different features. Be sure that loans or withdrawals from your policy don’t reduce the amount your beneficiary will inherit, cause a lapse in your policy, or generate a liability in your income tax. Also, note that overfunding life insurance policies is only possible with universal or whole life insurance, not term life insurance.

At Trajan Wealth, we recommend talking to a financial advisor before making the choice to overfund your life insurance. We’ll be able to spot any issues that may arise and offer our professional opinions on them.

What If I Want to Look into Overfunding My Life Insurance Policy?

We’d love to help! Our team can answer your questions about overfunded life insurance policies, look into your individual life insurance policy, and get you set up. Making smart financial decisions today is one of the best ways to influence your financial health tomorrow.

Contact us to learn more!