Reasons Why You Must Take Out A Whole Life Insurance Policy

Is Life Insurance Tax Deductible?

The driving force behind all insurance policies is to acquire indemnification for loss, liability, or death. This principle applies to a greater extent to Whole Life Insurance. In this particular case the insurer intends the beneficiaries to benefit after his/her death. And therefore the question whether life insurance is tax deductible or not deserves close examination. This is a question that anyone who intends to draw out a life insurance policy must answer.

Before purchasing a policy one must ascertain the terms and conditions stipulated in the policy in terms of premiums. Terms do vary from one insurance company to the other, or from one country to the other.  Some conditions might negate the very act of financially empowering the beneficiaries after the death of the insured. But generally speaking, it is common practice that the higher the premium, the greater the benefits. However, the pillar in any life policy is the cause of death because if it can be proven that fraud is involved due to either intentional death or concealed illness during application, the insurer can lawfully reject the claim.

So, is life insurance tax deductible or not? In general practice it is not, except under special circumstances. Even though both insurance and tax laws are as capricious as a tropical typhoon, the relationship between life insurance and taxes is invariably the same. In case of Whole Life Insurance, there are inherent tax advantages but not deductions. In the US, for example, a comprehensive policy guarantees freedom from income tax if the proceeds come in form of monthly payments or a lump sum. This is designed to protect the recipient(s) from unnecessary financial obligations to the state.

While the policy is in force (active), there are cash values such as accumulated dividends and interests that the policy attracts free of income tax. This frees the policy owner from the burden of extra taxes. However, there is one situation in which taxes can apply. The cash values on a life policy empowers one to take out a loan which is easily repaid over a period within certain limits in the policy. If a person dies before such a loan is fully repaid, the impending balance is usually deducted out of the death benefits. Such a situation definitely has tax consequences for the beneficiary(ies). It is clear then that life insurance is not tax deductible as a general practice. But when other circumstances intrude, then conditions that give rise to taxation might obtain.