Is Life Insurance Tax Deductible?

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*Article prepared by Northwestern Mutual with the cooperation of Chris Welton, Wealth Management Advisor for Rob McCarthy, 101 Loan LLC.*

By Carl Engelking, October 06, 2021

Life insurance can be an important part of your financial planning. With permanent life insurance, in addition to a guaranteed death benefit that is typically tax-free, your policy will build cash value that can accumulate over time in a tax-advantaged way.

Are life insurance premiums tax-deductible?

If you hopped on the internet for a quick answer to this question, we’ll save you some time: for the most part, no, they aren’t, but there is one exception (more on that in a moment).

Life insurance premiums are considered a personal expense, and therefore not tax deductible. From the perspective of the IRS, paying your life insurance premiums is like buying a car, a cell phone or any other product or service. There’s also no state or federal mandate that you purchase life insurance, unlike health insurance, so the government isn’t offering you a tax break in this case.

Although premiums aren’t tax deductible, there are several tax benefits of a life insurance policy.

Business-paid premiums may be tax-deductible

If you’re a business owner, you can deduct business-paid premiums for life insurance policies that are owned by company executives and employees, and the executive or employee reports the premium as income.

OK, so your premiums aren’t tax deductible, but Uncle Sam still offers several tax breaks for life insurance policies.

Permanent life insurance cash value may be tax-deferred

Permanent life insurance policies, for example, feature a cash accumulation component in addition to coverage for your entire life. Cash value in a life insurance policy grows over time, and taxes are deferred on the growth. Once your cash value has grown it can be used as collateral on a loan, to pay for college, a house or even your premium payments1. If you surrender your policy, your cash value will typically be tax free up to your “basis”, or the amount of money that reflects your total premium payments. Any amount above the basis is considered a gain and would be taxed as ordinary income. Whole life, variable life and universal life are some of the most common types of cash value life insurance.

Permanent life insurance dividends are typically tax-free

Generally, cash dividends2 received from a life insurance policy are also tax free and don’t need to be reported as income, so long as the amount doesn’t exceed the net premiums you’ve paid on the policy. That’s because dividends are considered a return of policy premiums – you paid too much, so you get your money back.

Another huge tax advantage: Proceeds from a life insurance death benefit are generally tax free. Your family will be protected from financial hardship, and that payout won’t be considered income. However, if it is paid over time and the insurance company adds interest, those interest payments will be taxable. A financial professional can discuss how life insurance, and the accompanying tax benefits, can fit into a long-term plan.

1Each method of utilizing your policy’s cash value has advantages and disadvantages and is subject to different tax consequences. Surrenders of, withdrawals from and loans against a policy will reduce the policy’s cash surrender value and death benefit and may also affect any dividends paid on the policy. As a general rule, surrenders and withdrawals are taxable to the extent they exceed the cost basis of the policy, while loans are not taxable when taken. Loans taken against a life insurance policy can have adverse effects if not managed properly. Policy loans and automatic premium loans, including any accrued interest, must be repaid in cash or from policy values upon policy termination or the death of the insured. Repayment of loans from policy values (other than death proceeds) can potentially trigger a significant tax liability, and there may be little or no cash value remaining in the policy to pay the tax. If loans equal or exceed the cash value, the policy will terminate if additional cash payments are not made. Policyowners should consult with their tax advisors about the potential impact of any surrenders, withdrawals or loans.

2The dividend scale and the underlying interest rates are reviewed annually and are subject to change. Future dividends are not guaranteed, although Northwestern Mutual has paid a dividend every year since 1872.

This publication is not intended as legal or tax advice. Financial Representatives do not give legal or tax advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.

Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company (NM) and its subsidiaries in Milwaukee, WI. Christopher Edward Welton is an Insurance Agent of NM.

 

Do You Want to Buy First and then Sell Later?  Bridge Financing May Be the Answer!

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Do You Want to Buy First and then Sell After ?  Bridge Financing May Be the Answer!

Bridge Financing or Collateral Based Financing is a form of financing that allows a buyer of property to buy first (and close) and then sell their existing property later.  This allows them to make the strongest offer possible in a seller’s market often times without a loan contingency.  Once they sell their property, they can pay down any debts they owe and pocket the remaining funds as applicable. 

There are several ways to accomplish this and I have included them below:

  • 1st Option – Obtain a Line of Credit on current property to pay cash or use the line for the down payment of the new property.
  • 2nd Option – Do a Cashout Refinance and use that cash for the down payment or outright purchase.
  • 3rd Option – Get a Mortgage on Both Properties using A Paper (loans with the lowest rates)) that provides the necessary money to pay “cash” for the purchase with a closing of 30 days or less.  Then once the exiting property is sold, the proceeds from that sale pay down purchase money loan leaving you with a loan based on your overall equity and loan you desire or qualify for.
  • 4th Option – Apply for a Mortgage on Both Properties using B Paper (loans with higher rates)) that provides the necessary money to pay “cash” for the purchase with a closing of 15 days or less.  Then once the exiting property is sold, the proceeds from that sale pay down purchase money loan leaving you with a loan based on your overall equity and loan you desire or qualify for.

Each of these have pro’s and cons.  In order to determine which one is best for you, please complete the following and I will provide , your client qualifies for and is in their best interest, it is best to have them complete the following at:

https://101loan.com/purchasing/

Any questions, please contact me.  Thanks.

Best Regards,

Rob McCarthy

Senior Mortgage Advisor

www.101Loan.com

408-377-4123 o  650-465-8957 c   408-608-1921 f

101 Loan – 1601 S De Anza Blvd, Suite 260, Cupertino, CA 95014

CA DRE #01165697  NMLS #121019

Products/Services/Accolades:

  1. Residential Financing for Purchases and Refinances on 1 to 4 unit properties.
  2. Reverse Mortgage Financing to include Conforming, Jumbo, HELOC Jumbo’s.
  3. Commercial & SBA Financing to include Multifamily, Office, Retail and Light Industrial.
  4. Access to over 50 banks with over 200 “Five Star” Reviews on Yelp, Google, Facebook and Linkedin.

 

 

Eight Myths About Estate Planning

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One of the Most Important Things Every Family Should Have…

As your wealth increases or your family expands, its so important to have an estate plan also known as a living trust that not only reduces your tax liability as life events occur but also dictates what is to occur when a life event happens.  For more info on estate plans, please see below or contact me for a referral in your area or based on what you are looking to do.

 

All the Best,

Rob McCarthy

Senior Mortgage Advisor

www.101Loan.com 

408-377-4123 o  650-465-8957 c   408-608-1921 f

101 Loan – 1601 S De Anza Blvd, Suite 260, Cupertino, CA 95014

CA DRE #01165697  NMLS #121019

 

Eight Myths About Estate Planning

Somita Basu – Partner-Norton Basu LLP 

www.nortonbasu.com 408.850.7250 sbasu@nortonbasu.com

Myth 1: Everyone knows they need an estate plan.

This may seem like common sense, but as we know, common sense isn’t so common. The
majority of all Americans will die without an estate plan of any kind in place. Many people don’t
want to think about their eventual death or leaving their loved ones behind. But less than half
of all Americans have an updated estate plan that accurately reflects their wishes. The lack of
an updated estate plan results in the inefficient transfer of assets and incurs legal costs, trauma
for the beneficiaries, and expensive delays.

Myth 2: I don’t have an estate!

The word ‘estate’ can conjure up visions of castles, mansions, and the American version of
Downton Abbey. But in the context of estate planning, your ‘estate’ consists of everything you
won, no matter how little or how much. Anything you own in your name as an individual (or
jointly with a spouse or partner) is part of your estate. So, yes, you do have an estate. The
question is who decides what happens to your estate? You or the state of California?

Myth 3: I only need to worry about who gets my house.

Given Bay Area real estate prices, it’s natural to focus on what will happen to your house when
you die. Which child should get the house? Who should be able to live in it? Should rent be
paid? But you need to worry about more than just your house or rental properties. You also
have to consider your bank accounts, investment accounts, and even sentimental pieces of
property – maybe a book passed down for generations, wedding jewelry, or even photographs.

Myth 4: I’m not old enough to need an estate plan.

As soon as you turned 18, you needed an estate plan. At that age, an Advanced Health Care
Directive and Power of Attorney should be completed. When you become a legal adult, your
parents no longer have automatic access to your medical information or your assets. They will
need validly executed and notarized legal documents to help you should the need arise.
Remember, the components of an estate plan will vary with each individual’s need. It’s never a
one-size-fits-all option.

Myth 5: A will and a trust are similar.

A will and trust are only similar in that they both direct the disposition of your assets after your
death. But a will MUST go through the probate process in California while a properly funded
trust avoids court supervision in the vast majority of cases.

Myth 6: My will is a private document.

A will is a private document while you’re alive. But once you die, the original Will must be
lodged with the probate court. This Will then becomes a public document. Anyone can access
this document and your beneficiaries can definitely expect multiple calls from realtors,
investigators, and others. A Trust by comparison is a private document available to only your
beneficiaries and direct relatives. The only time a Trust becomes public is if litigation is
involved.

Myth 7: My agent can use my Power of Attorney after I die.

So many people seem to believe the Power of Attorney document allows access to their bank
accounts even after they die. This is simply not true. The agent acting under your Power of
Attorney only has access to your bank accounts and financial information while you are alive.
Once you pass away, anyone who requires access to your accounts will need court approval or
must be acting as Trustee of your trust. Either way, legal documentation will be required.

Myth 8: I can do my estate plan online with no problem.

Online estate planning packages have serious deficiencies. The legal language is faulty and
multiple legal issues are not addressed properly. But those are technical issues. The question is,
do you want your assets to pass to your beneficiaries as smoothly as possible or do you want a
one-size-fits-all option you can complete online without the advice of an experienced attorney?
Ask yourself, if you found a lump in your lymph node, would you Google the treatment or go to
a specialist and get tested and follow a prescribed treatment plan? Don’t leave something as
important as your legacy to an algorithm. Talk to an experienced estate planning attorney.