Tackle Your Tax Burden with a Well-Designed Life Insurance Policy

Tackle Your Tax Burden with a Well-Designed Life Insurance Policy

April 29, 2024

For many high-net-worth (HNW) individuals, managing finances and minimizing their tax burden are top priorities. One strategy that often gets overlooked in the pursuit of reducing taxes is life insurance. While life insurance is traditionally thought of as a way to provide independence for loved ones after one's passing, it can also be a valuable tool for tax planning. This article explores how HNW individuals can use life insurance to lower their tax burden.

The tax benefits of life insurance

First and foremost, life insurance can provide significant tax benefits upon death. The death benefit the policy's beneficiaries receive is tax-free and not subject to federal or state income taxes. Additionally, life insurance proceeds are not subject to probate, which can save both time and money and quickly pass to heirs.

However, life insurance's tax benefits continue. Life insurance can be used to transfer assets to future generations without incurring gift or estate taxes. By setting up an irrevocable life insurance trust (ILIT) strategy, individuals can remove the value of their life insurance policies from their taxable estates. The death benefit paid to the trust's beneficiaries may not be subject to either gift or estate taxes.

Life insurance as part of business planning

Life insurance can also help business owners lower their tax burden since premiums are deductible. Critical person insurance, also known as key man insurance, is a type of life insurance policy taken out by a business on the life of a key employee or owner. In the event of their death, the company receives the death benefit to help cover any financial losses or expenses incurred due to the loss of that individual. The death benefit is not taxable, making it an asset for the business.

Another way that business owners can use life insurance for tax planning is through buy-sell agreements. Buy-sell agreements outline what can happen to a business in the event of an owner's death or disability. In these situations, the remaining business owners can use the life insurance proceeds to buy the deceased or disabled owner's share of the business, providing independence for both parties. Again, the death benefit received is not taxable, saving the company from significant tax liabilities.

In conclusion, HNW individuals have many options for using life insurance as a tax planning tool. From minimizing income and estate taxes to transferring wealth to future generations and preserving their businesses, life insurance offers numerous benefits that may significantly lower their tax burden. Working with financial and tax professionals is essential when considering life insurance as part of your overall tax strategy to thoroughly understand the pros and cons outlined in this article.


Important Disclosures:

This material contains only general descriptions and is not a solicitation to sell any insurance product, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice, you should consult an insurance professional. You may also visit your state’s insurance department for more information.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by Fresh Finance.

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