Life Insurance

The next advantage would be the tax deferred cash value growth. When the premium payments exceed the policy’s expenses and insurance costs, the cash value continues to accumulate along with the interest that is credited to the policy’s cash value each year. Life insurance is one of few products that accumulates cash and gives the option to defer the taxes of the cash value and structure distributions of those funds tax free. There are advantages in other retirement and savings plans that have tax deferred growth as well.

Policy loans have the possibility to be accessed tax free. This can be accomplished as long as the life insurance policy is not classified as a Modified Endowment Contract (which happens when a life insurance policy becomes overfunded), according to the Internal Revenue Code (IRC). If the policy is not classified as such, withdrawals are not subject to tax until the cash value withdrawn exceeds the policy’s premium basis. Future withdrawals are subject to taxation once a policy’s basis has been withdrawn. Additional conditions apply to taxing loans such as if a policy is surrendered or lapses. If this happens, any outstanding loans are treated as cash value distributions and are then subjected to taxation if the amount is greater than the policy basis.