Tax Considerations with Life Insurance

Life insurance can provide certain tax advantages:

Death Benefit:

• Generally not subject to income tax, so beneficiaries receive the full amount. However, if the policy is part of a large estate, it might be subject to estate taxes.

Cash Value:

• Tax-Deferred Growth: Cash value grows tax-deferred, meaning you don’t pay taxes on gains while they’re inside the policy.
• Loans and Withdrawals: Loans are tax-free if managed correctly, and withdrawals are generally tax-free up to the amount you’ve paid in premiums. If withdrawals exceed premiums, you may owe income tax on the gains.
• Policy Surrender: If you surrender (cancel) the policy and receive a payout greater than the premiums you paid, you may owe taxes on the gains.

Modified Endowment Contract (MEC):

• If a policy becomes an MEC (from paying too much premium too quickly), it loses some tax advantages. Withdrawals and loans are taxed similarly to investment gains, with penalties if taken before age 59½.