Tax Benefits of Life Insurance and Annuities

Life insurance policies and annuities can be helpful in providing extra protection and income for you and your family. But you can also increase the value of these benefits with certain tax advantages that each insurance solution provides. Here are some ways that life insurance and annuities provide you with tax benefits.

Life Insurance Tax Benefits

Tax-Deferred Growth

Permanent life insurance policies can grow their cash value on a tax-deferred basis.^[1] As a result, the money you’ve allocated to the cash value can grow without any immediate tax liability on your end.^[2] Further, unlike many other types of income, your life insurance earnings typically do not contribute to increasing the taxes you may pay on your Social Security income.^[3]

Death Benefit Transfers

When you purchase a life insurance policy, you name beneficiaries who would inherit your policy’s benefits once you or your spouse passes away. Once this happens, the policy’s death benefit will transfer to your named beneficiaries. When this transaction happens, your loved ones are able to receive this payment without paying any income tax; it doesn’t matter if the death benefit is $75,000 or $5 million.^[4]

Cash Withdrawals

As a policyholder, you’re able to tap into the cash value of your permanent life insurance to withdraw funds, if you have the value available. When you do this, you can generally withdraw the money tax free; but there is a catch. The withdrawal is only tax-free on an amount up to the “basis” that you have in the policy, which is the premium payments you have deposited into your policy.^[5] Once you take out money above your basis, then the funds can be taxed like ordinary income.^[6]

Annuities Tax Benefits

Contributions

As an annuities holder, you’re able to make contributions to your policy with no annual limits, and the money compounds with a tax-deferred status[7]. But when purchasing these items, you need to account for taxes differently depending on the annuity you bought. You can buy qualified annuities with pre-tax dollars, and your original contribution is tax deductible. Meanwhile, you purchase non-qualified annuities with post-tax dollars, so they are not tax deductible.^[8]

Withdrawals

Overall, once you start taking withdrawals from your annuities, you will have to pay an ordinary income tax on these earnings. But, once your annuity's value is below the amount of your original investment, your liabilities change and your withdrawals will be tax-free.^[9]

The tax benefits and strategies across your life insurance, annuities, and other investments are specific to your unique needs and goals. And knowing how tax details apply to your investments and long-term objectives require thoughtful planning in every life stage. To explore your tax strategies with your life insurance policies and annuities, feel free to contact us any time. We’re happy to help you find the answers you need to make the most of your financial journey

^{These are the views of Platinum Advisor Strategies, LLC and not necessarily those of the named representative, Broker dealer, or Investment Advisor, and should not be construed as investment advice. Neither the named representative nor the named Broker dealer or Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.}

^{An annuity is intended to be a long-term, tax-deferred retirement vehicle. Earnings are taxable as ordinary income when distributed, and if withdrawn before age 59 ½, may be subject to a 10% federal tax penalty. If the annuity will fund an IRA or other tax-qualified plan, the tax deferral feature offers no additional value. Qualified distributions from a Roth IRA are generally excluded from gross income, but tax and penalties may apply to non-qualified distributions. Please consult a tax advisor for specific information. There are charges and expenses associated with annuities, such as deferred sales charges for early withdrawals.}

^{Please keep in mind that the primary reason to purchase a life insurance product is the death benefit.​}

^{Life insurance products contain fees, such as mortality and expense charges (which may increase over time), and may contain restrictions, such as surrender periods.}

^{Policy loans and withdrawals from a life insurance policy may create an adverse tax result in the event of a lapse or policy surrender, and will reduce both the cash value and death benefit.}

^{Securities and Investment Advisory Services offered through Securian Financial Services. Member FINRA/SIPC. Shoemaker Financial is independently owned and operated. Shoemaker Financial 2176 West Street, Suite 100, Germantown, TN 38138. Neither Securian Financial Services, Inc. nor Shoemaker Financial are affiliated with Platinum Advisor. No. 2093766 DOFU 4.30.18}

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1. ^{http://www.investopedia.com/articles/pf/07/permanent_life_insurance_taxes.asp}
2. ^{http://www.investopedia.com/terms/t/taxdeferred.asp}
3. ^{http://www.investopedia.com/articles/pf/07/permanent_life_insurance_taxes.asp}
4. ^{http://www.investopedia.com/articles/pf/07/permanent_life_insurance_taxes.asp}
5. ^{http://www.nasdaq.com/article/using-tax-advantages-of-life-insurance-in-your-financial-plan-cm583240#ixzz4ZbtUaDFS}
6. ^{http://www.nasdaq.com/article/using-tax-advantages-of-life-insurance-in-your-financial-plan-cm583240#ixzz4ZbtUaDFS}
7. ^{http://money.cnn.com/retirement/guide/annuities_basics.moneymag/index4.htm?iid=EL/&__c9adg=3504732db375443cbbd7e2816de6291a&__c9auth=1}
8. ^{http://www.investopedia.com/articles/personal-finance/021716/maximize-tax-benefit-your-annuity.asp}
9. ^{https://www.fool.com/retirement/2017/01/09/what-are-the-tax-benefits-of-annuities.aspx}