What are the Universal Life Insurance Tax Benefits?

There can be several attractive universal life insurance tax benefits. First, the funds that are in the policy’s cash value component are allowed to grow tax-deferred. This means that the money can accumulate over time, without the policy holder having to paying tax on the gains while they remain in the account. This can allow for exponential growth over time, as the cash value funds earn interest on the principal, as well as interest on the past gains, and interest on money that would otherwise have been paid out in taxes.

Because there are no maximum contribution limits like there are with qualified retirement plans (such as 401k plans), and with traditional IRAs, an IUL policy holder can also earn additional tax deferred gains by placing more money into the policy.

If an indexed universal life insurance policy holder wants access to the cash value funds, he or she could do so via a policy loan, rather than through a withdrawal. In doing so, the money from the IUL policy can also be accessed tax free in order to supplement retirement income, or use for any other purpose.

When the death benefit on an indexed universal life insurance policy is paid out to the beneficiary (or beneficiaries), this money is received free of income taxation – which in turn, allows the recipient to use 100% of these proceeds.


Hands writing the words ‘Tax Planning’ depicting the tax benefits of IUL products.

IUL Tax Benefits

If you’re like most investors today, you are likely not just worried about market volatility and safety of principal, but also about the amount of money that you are liable to pay in taxes. In fact, many people are concerned about future market fluctuations, as well as rising taxes, eroding both current and future retirement savings.

Including an Universal Life Insurance tax policy into your overall financial strategy can help you to alleviate much of this concern – both while you are saving money, as well as when the time comes to take your money out.

Using Universal Life Insurance as a Tax-Free Retirement Savings Vehicle
If you have a large IRA account, then it is likely that you will also have a tax problem in the future when you begin to take your withdrawals. This is because, if you contributed to your traditional IRA pre-tax, and the funds inside of the account have grown tax-deferred, 100% of the money that is taken out of the account will be subject to income taxation.

While traditional IRAs and qualified retirement accounts can provide the opportunity to defer your taxes until a future time, this doesn’t mean that you will never have to pay taxes on your money – it just means that you will be paying them at a time in the future. And typically, for those who are in retirement, it is essential to make use of each and every dollar possible.

Here is where an universal life insurance tax policy can provide you with additional advantages . For example, the funds that are in the cash value of an IUL account are also allowed to grow tax-deferred. So, similar to a traditional IRA or retirement plan, your IUL funds can also grow and compound over time without annual taxation. Unlike your traditional retirement accounts, though, you can access your money tax-free from the IUL account.

An Indexed Universal Life Policy will also not limit the amount of contribution that you can make each year. So, you can contribute more – often, much more – than you are allowed to deposit on an annual basis to your IRA or 401(k), in turn, providing you with more funds to accumulate on a tax-advantaged basis. And, if you earn too much to qualify for a Roth IRA, an IUL policy can provide you with a viable solution for contributing to a tax-advantaged vehicle.

On top of that, the IUL policy will not require you to begin taking withdrawals when you turn age 70 1/2. With traditional IRA and 401(k) plans, this time in your life signifies that you must begin to take a certain amount of money out of your account, which is referred to as a Required Minimum Distribution. If you don’t, then you face a penalty from the IRS.

But, with an IUL policy, you can continue to let your funds grow if you don’t need the money – and, you can even continue to contribute more into the plan. And, should the unexpected occur, the tax-free death benefit on an IUL policy can provide your loved ones with funds that may be needed to pay off debt and to continue forward without having to alter their lifestyle drastically.

Is IUL the Right Choice for You?