Having a lot of money in the bank can be a great thing, especially if the money you have is designed for your retirement, but having the money in the wrong investments can also result in paying a lot of taxes. The investments you choose to purchase with your money can either increase your tax liability or decrease it, and there are a number of good strategies you can use as a way to decrease your tax liability. This is often referred to as asset protection, and using life insurance is one good option you may want to consider.
What Type Of Life Insurance Should You Choose?
While there are multiple types of life insurance policies you can choose from, there are two main categories. The first is term-life, and this is the type that is only good for a certain amount of time. For example, if you are 50 years and purchase a 20-year policy, your policy will only last until you are 70. If you die before you are 70, your beneficiaries will receive the stated payout. If you don't, the policy will simply end.
The other type is called permanent life insurance, and this is a great option for many reasons, including for asset protection. Within the category of permanent life insurance, you will find several options, including whole life insurance. Any option within this category can be highly beneficial for use as a tax shelter. The options within this category are not designed for only a stated term, and this is why they are referred to as permanent life insurance.
How Can Permanent Life Insurance Offer A Tax Shelter?
Life insurance is primarily known for offering a cash payout to beneficiaries when the insured person dies, and this is true of all life insurance types. A lot of people purchase these policies as a way of protecting their families. For example, if you are the sole provider of your family, you may want a policy that offers enough money for your spouse to pay off the house and put your kids through college if you were to pass away. This is a great reason to have life insurance, but it is certainly not the only benefit. Here are several other benefits you can receive through life insurance:
- Tax-free distribution of money – It costs money to buy life insurance, but the proceeds your beneficiaries receive will be completely tax-free. This is one of few investments you can make that you or your beneficiaries will not have to pay taxes on.
- Tax-deferred cash savings – Another key benefit of permanent life insurance policies is the ability to use them as a saving's account. Many policies allow you to add money to the insurance account as a way of saving money. The contributions you make for this purpose are almost always considered tax-deferred. This means you can put money in the account without paying taxes on the money. The other benefit of this is that you are allowed to borrow money from your cash value if you need to.
Using life insurance is a great supplement for asset protection, and many experts recommend doing this after a person maxes out their 401k plan and IRA plans. If you are in this position and need life insurance as well as a way to shelter some of your investments from taxes, buying into a life insurance policy might be a great route to look into.
If you are interested in learning more about life insurance as asset protection, or if you would like to learn about other methods you could use for sheltering your investments from taxes, contact a company that specializes in asset protection.