Proactive Tax Planning 4 of 6

Benjamin Haas |

5 Tax-Minded Reasons to Have Life Insurance


We offer proactive tax planning advice in an effort to accomplish two things: reduce your taxes while you are alive, as well as after you pass away. One way to kill both those birds with one stone is through certain kinds of life insurance. That’s because of two important tax attributes of properly structured permanent life insurance policies

  • First, the death benefit of an individual life insurance policy transfers income tax free to your beneficiaries
  • Second, the cash value accumulation inside life insurance policies can be income tax free as well

Now, we all go through an insurance curve of life, and there may come a time when we no longer feel we need insurance coverage to support our survivors. Perhaps that’s when we retire or when we no longer have debt or dependent children. When you’ve reached that point in your life, conventional wisdom may say to stop paying for life insurance. Yet, we believe that life insurance can still be a part of the plan.

Here are 5 additional “tax-minded” reasons, other than covering a survivor’s income needs, on why life insurance might still fit your financial plan later in life.

  1. To help create a tax-free legacy– Life insurance policies are contractual and guarantee that your heirs will get their tax-free money, so long as it remains in good standing. So regardless of any other assets in your financial plan, or how you plan to spend them down in the future, a life insurance policy can create a tax-free legacy.
  2. To help keep a tax-free legacy – Many of our clients already have small life insurance policies that have accumulated over time. If you were to cancel these insurance policies, there is a possibility that you will end up paying taxes on any investment gains. However, the IRS does allow for the tax-free transfer of value from one contract to another via what’s called a “1035 Exchange.” Consolidating policies could provide your heirs with a higher tax-free death benefit to keep or increase your tax-free legacy to your heirs.
  3. To leverage taxable assets - If it is your goal to pass money to your heirs and you are in decent health, get a quote to see what leverage a policy would provide you. Instead of writing your heirs a check today as a gift, it might be advantageous to consider gifting through life insurance at your death. A dollar today might buy you upwards of $2 or even $3 in the future. That’s good leverage.
  4. To help replace income taxes at death – As an example, beneficiaries can get slapped with healthy income tax liabilities when they inherit pre-tax retirement accounts such as traditional IRAs, employer 401(k) or pension plans because this inheritance is taxable as income (unlike life insurance). In the end, a beneficiary might actually receive as little as $0.65 or $0.75 for every dollar. Hence, a life insurance death benefit can replace money lost to taxes.
  5. Tax-free asset accumulation– Should you live a long and healthy life and not “need” the death benefit for survivor needs, the money that has accumulated in the policy could potentially be used to supplement your retirement income, and in doing so, not increase your taxable income liability.

Obtaining life insurance is not always an easy process, as one must be healthy enough in the eyes of the insurer to make the risk worth their while. But there can be great leverage in insurance, even later in life. So as you consider your retirement and estate goals, don’t forgot about the tax planning benefits of life insurance. It might be a worthwhile place to move a portion of your taxable assets, over time.


Guarantees are based on the claims paying ability of the issuing insurance company.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Haas Financial Group, US Financial Advisors and LPL Financial do not provide tax advice or services.

Securities offered through LPL Financial, Member FINRA and SIPC. Investment advice offered through U.S. Financial Advisors, a registered investment advisor. U.S. Financial Advisors and Haas Financial Group are separate entities from LPL Financial.


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