Tax Benefits of Whole Life Insurance – Is Life Insurance Taxable?

It’s not a secret that life insurance is widely used to protect loved ones when you’re gone. But did you know that you can have many tax advantages besides life insurance coverage?

Specifically, if you choose a whole life insurance policy, you will have lifelong coverage and many tax benefits.

And it’s not all. Keep reading this article, and you’ll learn how to utilize your policy to pay other taxes. 

Let’s get started!

What Are the Tax Benefits of Whole Life Insurance?

The primary goal when you buy life insurance is to protect and provide for your family when you pass away. With a whole life insurance policy, you can have life coverage for your entire life. Moreover, a whole life policy will help you and your beneficiaries to manage tax consequences.

A quick note before we start: If you’re unfamiliar, a whole life insurance policy is a type of permanent life insurance. Unlike term life insurance policy, whole life coverage lasts as long as the premiums are paid. It also has a cash value component guaranteed to grow in a tax-advantaged way.

You can read our previous articles if you’re interested in learning more. You’ll find out how life insurance works, how much life insurance coverage you need, what the difference is between whole life insurance and term life insurance, and much more.

Let’s see the tax advantages of whole life insurance policies:

Tax-Free Death Benefit

Unlike other life insurance policies, whole life insurance offers a guaranteed death benefit (the amount paid to your beneficiaries). This means that amount will always stay the same.

And there is more. The death benefit of a whole life policy is not subject to federal income taxes. As a result, your beneficiaries will get the total sum.

Tax-Deferred Growth

The simplest explanation of tax-deferred growth is: earn money now, pay taxes later. Inside the whole life insurance policy, the cash value grows on a tax-deferred basis while the funds remain in the policy.

Tax-favorable access to the cash value through withdrawals

If you buy whole life insurance, you’ll have many living benefits. You can access cash values during your life under favorable First-In-First-Out (FIFO) tax rules. So, withdrawals to the size of cost basis are considered tax-free returns.

Tax-favorable access to policy loans

Another benefit an insured person can enjoy is access to policy loans which they can use for anything they want. The loans policyholders take against a whole life policy are not considered to be taxable events. And the loans remain non-taxable even if the policy has a large gain over premiums paid.

You can pay taxes with your policy

Besides all these benefits, you can also start the Infinite Banking process. If you’re not familiar with it, it is a concept that allows you to take up loans on the whole life insurance policy.

These loans are helping policyholders to cover the financial load. They can be used for anything, from repaying outstanding loans to paying taxes. And the best part is – you don’t have to pay back your loans.

Think about Infinite Banking as a traditional banking system, but better. You borrow money from yourself instead of the banks and use it. 

In the following paragraphs, we’ll explain how you can use your whole life insurance in various ways.

What Are the Different Ways to Use a Whole Life Policy?

About 52% of Americans use a life insurance policy for life coverage, according to LIMRA. But there are other ways you can use your policy.

If you choose whole life insurance, there are many ways to profit from it. We highlighted different circumstances when having whole life insurance can be effective.

permanent life insurance

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Business Protection

If you’re a business owner, you probably have been looking to create a business continuity strategy in case a partner or key team member dies. Business owners often use whole life insurance to help them provide the capital to buy interests.

Whole life can support you in four major business strategies:

  • Paying off loans and mortgages;
  • Financing the buy-sell agreements and stock redemption plans;
  • Funding additional retirement programs;
  • Allowancing the key person.

Estate Planning Strategies

Planning property transfer after death is far from enjoyable. Still, it can be beneficial in minimizing taxes and proving heirs in a way you wish.

In this unpleasant task, whole life insurance supports you by offering:

  • Assets to generate income for your spouse and children;
  • Liquidity to pay inheritance and estate taxes;
  • Estate compensation among heirs;
  • Financing for special needs.

Asset Utilization

Whole life insurance can help you enhance the value of other assets in your estate. It is one of the most exclusive advantages.

Whole life insurance can enable the policyholder to use estate assets in ways that wouldn’t be possible otherwise. For instance, a ”permission slip” allows you to utilize other aspects of the retirement income and personal net worth. It also allows you to spend assets that may not otherwise be used.

Many investors choose a whole life insurance policy because it can also serve as the basis for a charitable remainder trust. If you have a thriving business or investment portfolio, you will probably face capital gains taxes when those are sold for retirement income.

You’ll also want to support charitable causes that reflect your interest. This is when a charitable remainder trust comes into play. These two diverse needs you can achieve with only one plan – whole life insurance.

Infinite Banking

Infinite Banking is a financial strategy that allows you to take control of your savings and debt needs. “What does that have to do with the whole life insurance?” someone might ask. It is the best part – a whole life insurance policy and Infinite banking are working together!

With whole life policies, you can access accumulated premiums you’ve paid. You can borrow against that sum. While this attracts interest, the interest is set when you take out the policy.

Infinite banking uses dividend-paying whole life policies as the vehicle for your savings. So, if you use whole life insurance, your money is guaranteed to grow without taxation. 

Your money is in a stable, tax-free growth environment, and you can access those funds whenever needed. As a result, you can finally finance your own lifestyle. 

That’s why we like to call it – Lifestyle banking. It requires a little studying, but there are no limits once you learn.

You can take a loan for anything you need, and by that, you’ll also be maximizing how your money works because the cash value continues to grow and receive dividends. For every significant purchase in your life, Lifestyle banking got your back.

Of course, you have to pay back your loans to the policy. The process is the same as you would with an actual bank, with one primary difference – you are the one who recaptures the interest, not the bank.

You treat your money the same way a bank does. So, you have become your own banker! This is a closure of waiting to get approved for loans and paying high-interest rates and fees.

Remember how we said you could use your policy loans for anything you need? Well, you can – including financing your taxes. 

How to Finance Your Taxes Through Your Banking System

If you think, “Why would I want to use my policy to pay taxes when I can use it for more exciting things?” you’re not wrong. But don’t you need to pay taxes anyway? Unfortunately, you do. 

Why not use your whole life policy to get that money back? We know paying taxes isn’t the first thing that crosses our mind when someone says you can purchase anything you want. However, we still have to do it, and it’s way better to do it this way because you’ll also capitalize on the growth inside your policy.

Firstly, let’s see how we were paying our taxes before Infinite banking and how you’re probably doing.

Before Infinite Banking

We had a tax savings account where we stashed 33% of every dollar we made. So, every time we got paid for anything throughout our business, we saved a third of it in this account.

When the taxes are due, we would calculate how much we owe, take money from the savings account and pay taxes for that year. After this is done, the whole process starts all over again.

With Infinite Banking

Here is how we finance our taxes today, thanks to Lifestyle banking and whole life insurance.

We have a policy designated to taxes only. And instead of putting money into our savings account, we now store one-third of our earnings in the policy.

cash value account

Let’s do some math to be more accessible.

For example, let’s say we owe $15,000 in taxes. As business owners, we owe taxes at the end of the year.

Our policy for taxes is our youngest policy; we’ve just paid our second year of life insurance premiums. We have a $12,000 deposit in it. The cash value of the policy is $16,339.

Because of our obligation, we borrow $15,000 from the whole life policy. That money goes to the segregated account. After that, the segregated account pays what we owe in taxes.

So, the taxes are paid.


Quick note: We use a segregated account because we can’t pay directly from the whole life policy to our taxes. All our banking functions will be in a segregated account because it’s separate from our personal expenses and income (business or private).

The next step is to make those payments to recapture the principal in interest we pay for our taxes. $15,000 divided by 12 months is $1,250.

IRS pays 10% interest, or at least that is what they charged us. So, our monthly payment will be $1,250 plus 10%, which is $1,320 in total.


The process now goes in the opposite direction. We put monthly payments in our segregated account, and from it, we’ll make payments to the insurance company.

Why do we do this way? Because every single year insurance company sends you a statement with the amount of interest that you’ve paid from the money you borrowed.

What is the conclusion? By using Lifestyle banking and whole life insurance, you’re not only financing your taxes, but you’re able to create additional money.

This way, at the end of the year we:

  • Captured the principal in interest;
  • And also utilized the growth inside our policy so we can repeat the process the following year. The growth rate is a 4% compound interest in the dividends that grow in our policy, and we are able to use more money as the income increases for tax purposes.
    For instance, the following year, we’re able to take a loan of $25,000. And the year after, we can withdraw a $35,000 loan from our whole life policy.


The best part? You can repeat this process repeatedly, and for any reason you need. There is no limitation with Infinite banking – it helps you work towards your goals, not against them.

Summary

Here are the key takeaways from this article:

  • Whole life policies are the best life insurance plans because they offer permanent coverage, multiple advantages regarding the estate tax, and the opportunity to start your own bank.
  • Whole life insurance and Lifestyle banking can work together to provide unlimited possibilities to achieve your goals and build wealth.
  • Whole life insurance is much more than just life insurance coverage. It is the way to invest, multiply, and make more money.

You have all of these facts, and what now? It’s time to learn even more!