Tax Planning With Life Insurance

2231 WordsApr 14, 20169 Pages
Table of Contents Tax Planning with Life Insurance 3 What is tax planning with life insurance? 3 What is the tax-deferred buildup of cash value? 3 What are the general tax rules for life insurance? 3 What about modified endowment contracts? 5 What about personal life insurance trusts? 5 Regarding business insurance, what are some of the planning vehicles? 6 How can tax planning with life insurance help you with charitable giving? 7 Disclosures 8 Tax Planning with Life Insurance What is tax planning with life insurance? Life insurance can help you achieve various goals. Tax planning with life insurance involves minimizing the tax consequences of your life insurance decisions. Tax planning vehicles involving life insurance will vary,…show more content…
Thus, the buildup (increase) of the cash value represents tax-deferred income. What are the general tax rules for life insurance? For federal income tax purposes, an insurance contract cannot be considered a life insurance contract (and thus qualify for favorable tax treatment) unless it is treated as a life insurance contract under applicable state law and meets either the cash value accumulation test or the cash value corridor test. The tax treatment of your life insurance policy will vary depending on the type of distribution (i.e., a lifetime distribution, or death proceeds, or dividends). Generally speaking, lifetime distributions (other than loans) from such cash value life insurance policies are treated as made on a first in/first out (FIFO) basis for federal income tax purposes. In other words, money that you take out is treated as your nontaxable basis or investment in the contract first. Only amounts that exceed your basis are treated as taxable distributions. Distributions A lifetime distribution is any payment of the cash value of a life insurance policy during the lifetime of the insured, as opposed to the payment of the proceeds following the death of the insured. Generally, there are three major types of lifetime distributions: loans, partial surrenders, and full surrenders.  With a loan, the policy owner borrows money from the insurance company, using the cash value
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