Death benefits are generally received income tax-free by your beneficiaries. In the case of permanent life insurance policies, cash values accumulate on an income tax-deferred basis. That means you would not have to pay income tax on any of the policy’s earnings as long as the policy remains in effect. In addition, most policy loans and withdrawals are not taxable (although withdrawals and loans will reduce the cash value and death benefit).2
Life insurance (or life assurance, especially in the Commonwealth of Nations) is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money (the benefit) in exchange for a premium, upon the death of an insured person (often the policy holder). Depending on the contract, other events such as terminal illness or critical illness can also trigger payment. The policy holder typically pays a premium, either regularly or as one lump sum. Other expenses, such as funeral expenses, can also be included in the benefits.
Response 1: This has to be the most common objection. I understand it, but I don’t totally agree with it, so please give it a LOT of thought and decide for yourself. Let’s begin with the idea that insurance is not an investment. That is false. It is absolutely an investment. You spend money in expectation of a financial return, the size of which is usually known but the probability of which is oftentimes unknown (because many people cancel term policies or cannot renew them before they pass away).
4. If you end up wanting permanent life insurance when you get older, you have plenty of options other than buying whole life insurance as an investment when you’re young. You could convert a term policy. You could buy guaranteed no-lapse universal life. There are plenty of options that don’t require you lock yourself into a poorly-performing policy at a young age when that cash flow would be better used elsewhere.
Hi Christine. First of all, thank your for stopping by. Second of all, please don’t beat yourself up over this. Life insurance salesmen are trained to make these policies sound REALLY attractive and their arguments can be quite persuasive. I actually found myself feeling close to convinced about one of these policies a few years ago before coming to my senses.