The Tax Advantage of Permanent Life Insurance

The main reason for buying life insurance is to make sure that your loved ones are financially secure in the event of your death, no matter the state of the economy or the health of the financial markets. However, life insurance gives you other advantages as well, and they relate to taxes.

With permanent life insurance, the coverage lasts for your whole life, and when the death benefit is paid, it is generally received income-tax free by your beneficiaries.

Another advantage? The cash value you've accumulated over the years due to interest or dividends has grown income-tax deferred. No taxes are due during the accumulation period, even after the policy's cash value exceeds the amount of premiums paid.

Life insurance is unique in that it can be an effective tool for both protection and accumulation. While it does provide a death benefit, some types of life insurance can also be used as a source of retirement income, funding for a child's education, or as a source of cash in an emergency. Policy loans or partial surrenders will decrease the cash value and have a significant impact on your policy's performance and future dividends. Should you die before the loan is paid off, any outstanding balance and interest will be deducted from the death benefit. Tax consequences may also apply.

An aside: What makes this borrowing benefit particularly attractive is that Americans are having a hard time saving. The U.S. savings rate has declined from 12% in the early 1980s to just about zero today.¹ Because of this lack of saving, many Americans don't have access to the cash they often need.

While taking money out of a policy through loans or a partial surrender reduces the death benefit, you can repay the loan at a later date, and so restore the original death benefit.

Lastly, the gains you earn from the policy are taxable only if you surrender the policy or allow it to lapse. If the policy remains in force until your death, the death benefit paid to your heirs is generally received income-tax free.

Simply put, you don't have to die to benefit from permanent life insurance. The tax advantages of this insurance product also work for you on many levels during your life.

Clearly, no single insurance or financial product is the answer for everyone. However, given its tax advantages, permanent life insurance may be an important financial tool to help families during life and protect heirs with a potentially tax-free death benefit. Your Northwestern Mutual Financial Network representative can help you identify whether or not permanent life insurance will make sense for your situation.

¹ Forbes.com "Financial Strategy Saving Grace" A. Gary Shilling, 2/14/05

The Northwestern Mutual Life Insurance Company, Milwaukee, WI.

The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.