Using Life Insurance as a Tax Planning Strategy

When thinking about estate planning taxes is a big deal.  It is always best to be proactive and have a strategic plan in place to aim to reduce your taxes and also take care of your loved ones.  Life insurance is a great tool because the death benefit received under the policy provides an immediate payment of the proceeds on the policy which is paid tax free to beneficiaries such as your spouse, children, or charities etc.

We all know the main benefit of a life insurance benefit plan is to provide for your family in the event that you pass away.  We wanted to explain the benefits from a tax perspective when purchasing life insurance within a corporation vs. personally.

The Growth of your insurance plan is tax free
The first benefit of paying for premiums within a corporation vs. personally, is that you do not have to pay for the life insurance costs with after tax personal dollars.   The second, is that the value of the life insurance plan grows tax free, since generally a portion of the life insurance premiums is invested in marketable securities inside the insurance policy.

Protecting Assets
In certain circumstances life insurance policies are protected within the policy, therefore no creditors or legal claims can be made on savings within the plan.

Benefits paid are tax free
When the insurance company pays the benefit, since the premiums were paid within the corporation, the funds are sent directly to the corporation first.  This way you can pay a tax-free dividend to the family estate in the of a capital dividend.  After the capital dividend is paid to the estate, the proceeds are distributed to your family members/ beneficiaries of the estate.

Case Story
Bob and Wendy are retired (both in their 60's) married with three children. They have accumulated sufficient wealth to provide for their retirement and have an additional $500,000 available within an investment holding company for the benefit of their 3 children. This holding company represents their 'never' money or capital which is set aside for the 3 children. Given the tax consequences arising upon death this pool of capital or their never money would be subject to high levels of taxation resulting in approximately $375,000 after-tax to be shared by the 3 children. By investing this same never money in an exempt insurance policy the capital available after-tax for this same estate distribution is approximately $1,500,000. The same starting capital of $500,000 generated an extra $1,125,000.

Work with experts
For more information please contact a life insurance tax planning expert:
Tony Salgado, CPA, CA, CFP, CLU 
AMS Wealth Inc. 
President & Founder 

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