Are Life Insurance Policy Loans Taxable

28 Feb

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Life Insurance Policies are one more way to accumulate tax deferred wealth and it is achievable to borrow against the money worth. But are Life Insurance Policy Loans Taxable?

A permanent life insurance policy has the added feature of accumulating a cash value over the life of the policy. This money worth can be utilised as security for a Life Insurance Policy loan. It is deemed as safety for the loan due to the fact it does not negate the coverage afforded by the policy as long as the loan is repaid. This truth impacts the taxation image simply because it signifies that you are not actually getting a distribution of the money worth.

Despite the fact that the premiums paid on Life Insurance Policies are not allowable as a tax deduction, the earnings in the policy are not taxed either. In this manner, the policy acts comparable to other forms of tax shelters such as IRA or 401k retirement accounts. Also, the death advantage that would be paid to your beneficiary upon your demise is commonly not topic to taxation either. Nevertheless, must you surrender your policy and take the cash value, the proceeds above the amount of your premiums would be subject to taxation.

If you borrow against the money worth of the policy, even so, it is not truly a distribution. It is not considered revenue simply because the quantity will have to be paid back at some point and also you will have to spend interest on the loan. A lot of people fail to realize this principle and feel like they are borrowing their own cash and wonder why they are paying interest.

The answer is that they are not borrowing their personal income at all. Their funds is nonetheless in the Insurance Account and nevertheless performing the intended function of supplying safety in case of the death of the policy owner. It would also still be accumulating earnings in accounts exactly where the money worth is invested. It is not regarded revenue anymore than a Mortgage loan or auto loan would be considered revenue for the purposes of taxation.

If failure to repay the loan leads to a lapse or cancellation of the policy, this will have tax implications. Considering that the cash value of the policy would, in a sense, be utilized to repay the loan, the quantity paid would be regarded as earnings as would any further funds distributed upon the surrender of the policy. Life Insurance taxation troubles are even far more of a minefield of complex regulations than even the norm for other varieties of investments. You are going to need to touch base with your tax expert and Insurance Agent to navigate this minefield effectively.

6 Responses to “Are Life Insurance Policy Loans Taxable”

  1. Leif January 21, 2013 at 1:37 am #

    How can life insurance coverage companies earn money from this?

    Should you pay insurance each month, will the insurance multiply what you devote??? Or will they only use the cash you devote? Like if you devote $25k, will they pay out back that quantity or double? wouldso would they create money this way?

    I am speaking about basically died. I’d like in my family to become supported.

    Shall We Be Held requesting whole existence or term insurance? I suppose both.

  2. Shane March 9, 2013 at 11:35 pm #

    I could go out and buy a deccent conair straightener for about $40
    then again I could go online and buy a sedu straightener for about $120

    Is there really a big difference when straightening your hair
    & is the extra money worth the cost.

    I haven’t owned a professional straightener, so I couldn’t say-

    EDIT: Yes sarah, another hair question! (: woop woop!

  3. Dorene April 27, 2013 at 9:35 am #

    I have two universal life insurance policies–one on myself and one on my wife. I have had these policies since 1996. In the summer of 2009 I borrowed against the policies because I had a money shortage due to disability. I would really just like to drop thes policies altogether because I am looking for a cheaper term life insurance ploicy. Can I just drop the policies without repaying the loan? I haven’t paid the premiums for the last several months. Will I be held liable for repaying the loan if I discontinue the policies? Any help would be appreciated.

  4. Minnie June 22, 2013 at 1:19 pm #

    Ok, my husband and I are in about $25,000 in debt, He lost his job so he gets unemployment which the amount doesn’t even cover all the bills, I don’t have an education (I do take classes to get my G.E.D.,they take up my entire day; literally. I will be finished with it on May. 31,2012),so I am currently unable to work. We don’t go out to eat at all(strict diets and we hate people to serve us).We don’t have any extra expenses because our families pay for mine and my husbands cell phone,house phone, cable, and my husbands car insurance bills. His check is gone as soon as we get it so we had to get food stamps and medicaid just to help keep food in the house for our son and ourselves. I can’t get a loan for school to go to college when I finish, I have been told that if I file for bankruptcy then I won’t be able to get a grant,by a friend. I hate being in debt, having to rely on family to pay our bills , and not ever having any money,even though I am grateful to have a family who is willing to help us out when we need it. I
    have done a lot of research on this matter and even went to 2 different financial planners who have both said to file for bankruptcy is our best option. We own an ugly old trailer(only worth $2500 and 1 automobile worth $3500, with a initial property value of $3100 so every thing we have is safe from the property liquidation process). Oh yeah did I mention we are expecting another child? So I have advised a plan:

    Plan:( we usually receive $5000-$6000 in income taxes FED and $687 State, Husbands pay check $1000 monthly even)
    1) File for bankruptcy after I get my income taxes.(Filing for bankruptcy can cost in between $500-$2000per person if filing separate or $700-$2500 if filed together and we have someone who owes us money who is going to pay for out credit counseling courses and test, still no where close to what he owe us).We are filing it together.We would be filing for Chapter 7 Bankruptcy.
    2)My husband and I would then open up a secure loan at the amount of $1200 each that has a 6.9% interest rate and fees.
    3)Now that all of the numbers have been ran, it is going to cost $1304.11 per person to pay off the secured loan ( I figure we just open up a savings account, each, with the loan and put in $104.11 per person to cover the cost) and make automatic payments from said savings account for 1 full year. As I am sure every one knows the longer the on time payment history is the better credit rating you will receive. ( I figure we will need to do this for 5 years)
    4)Take my husbands pay check and open 2 secured credit cards per person for $250 each with an interest rate at 1.5% .(only so low because it is secured, We both have terrible credit)
    5)Turn around and pay our monthly bills with the card( bills and monthly hygiene products equal up to $902 monthly without paying off debt,we won’t have any more.)
    6)Turn around again and pay off the cards with his pay check (our parents each said that they will give us $500 to pay for our 1st months bills free and clear as long as I finish school , so $1000 cash total.)
    7)Do this for 5 years while putting the released funds from the secured loan in a separate saving account at the end of each year for a house down payment($6,000 plus interest)
    8)Now 1 year after we set this up we will have 2 children, 1 will be 6 the other will be almost a 1.I will be finished with my G.E.D. education, Already started college( I found out the you can still get grants if you file for bankruptcy, they even have grants for people and student who have filed for bankruptcy,so my friend was wrong.)So now I can start saving for my children college,I chose the Gerber Life College Plan, I can pay $1206.12 annually from my income taxes so that they will have a fair amount to get them started(I am only getting $10,000 per child).
    9)Still 1 year after plan started, use the some of the money form my taxes to open up a life insurance policy for the family, I chose 1 for $100,000 and is $132.09 a year($25,000 per person).
    10)Still 1 year after plan started, put the rest of our income taxes (about $3007.68) every year for 4 year in our saving account for the house down payment(a total of $12030.72 plus interest)

    Ok so about 6 years into the plan we will have about $20,000 in savings for a home, a credit score of at least 700 FISO (each), a good size life insurance policy for the family, a college graduate, A working college fund for our children, and an eye out for a modest home.

    So my question is, Will my plan work if we stick to it? Oh yeah take in affect my hubby isn’t going to be unemployed forever and neither will I.

  5. Teri July 3, 2013 at 10:15 am #

    1 Participating dividends and any amount over the premiums paid is taxable
    2 The cash amount plus the interest earned on policies loans plus dividends less premiums paid are taxable.
    3 Only the surrender amount less the premiums paid is taxable
    4 Only interest earned and dividends are taxable

  6. Luciana July 11, 2013 at 5:53 pm #

    I am keen on getting a life insurance policy purely from an investment perspective. Any opinions would be helpful.

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