Five tax-time insurance savings

For many people, the first thought that comes to mind when they think of insurance is costly premiums. But as April 15 approaches, remember that some insurance products come with tax advantages that can save you money.

Consider these five insurance tax reminders by the nonprofit Life and Health Insurance Foundation for Education (LIFE). Some of the benefits include using various types of insurance to pay your estate taxes, helping you accumulate money on a tax-free or tax-deferred basis and even lowering your taxable income.

— Life insurance death-benefit proceeds are generally income-tax free. As long as your beneficiaries are specifically named, they won’t have to pay income taxes on the proceeds they receive from your life insurance policy.

— The premiums you pay for long-term care insurance may be tax deductible. Sixty-five percent of 65-year-olds will require long-term care services at some point in their lives. For the many who will require services for several years or more, the cost can be astronomical, so it often makes sense to consider long-term-care insurance. Depending on your age, adjusted gross income and other medical expenditures, the premiums you pay may be tax deductible on your personal income tax. If you are self-employed, there are even greater tax advantages by paying your insurance premiums through your business.

— Cash values that accumulate in permanent life insurance policies are income tax-free or tax-deferred. The annual gains you earn from traditional investments and savings vehicles must be claimed as income on your tax return. However, the gain in cash value that builds up over time in permanent life insurance policies can be tax-free or tax-deferred, depending on how you withdraw the money later on. What’s more, these gains are not subject to the alternative minimum tax.

Funds accumulated in a deferred annuity are tax-deferred until you withdraw them. An annuity can provide you with a guaranteed lifetime income and thereby deliver some much-needed stability and predictability to your retirement security plan. Moreover, with an annuity all gains are tax-deferred until you retire — at which point you may be in a lower tax bracket than you are currently. The portion of the funds paid out that are made up of previously taxed principal will be received tax-free. If you’ve hit maximum limits in other tax-deferred retirement savings accounts, an annuity can be an attractive option.

— An irrevocable life insurance trust (ILIT) can help minimize estate taxes. While life insurance proceeds at death are almost always free from income tax, they may be subject to estate taxes if they bring your assets over the exemption limit set forth by the IRS. An ILIT immediately removes new life insurance policy proceeds from one’s taxable estate by setting up an independent legal entity that is the owner and beneficiary of the policy. The ownership of an existing policy may also be changed to an ILIT, but the death benefits won’t be tax-free until three years have passed from the date the ownership was transferred to the ILIT.
source:http://www.timesrecordnews.com/news/2008/mar/14/five-tax-time-insurance-savings/