A life insurance tax shelter uses investments in insurance to protect income or assets from tax liabilities.

Life insurance 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 upon the death ...

proceeds are not taxable in many

jurisdiction Jurisdiction (from Latin 'law' + 'declaration') is the legal term for the legal authority granted to a legal entity to enact justice. In federations like the United States, areas of jurisdiction apply to local, state, and federal levels. Jur ...

s. Since most other forms of income are taxable (such as

capital gain Capital gain is an economic concept defined as the profit earned on the sale of an asset which has increased in value over the holding period. An asset may include tangible property, a car, a business, or intangible property such as shares. ...

dividend A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-in ...

s and

interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct ...

income), consumers are often advised to purchase life insurance policies to either offset future tax liabilities, or to shelter the growth of their investments from taxation. This insurance product is also known as

Private placement life insurance Private placement life insurance is a form of cash value universal life insurance that is offered privately, rather than through a public offering. Overview Variable or indexed life insurance is a form of life insurance that has cash value l ...

Life insurance to cover future taxes

In those jurisdictions where life insurance proceeds are only tax-free at death, tax liabilities that come due at death are often offset by a policy of the same size. Since the mathematics required to compare different strategies is quite complex, most consumers defer to an

accountant An accountant is a practitioner of accounting or accountancy. Accountants who have demonstrated competency through their professional associations' certification exams are certified to use titles such as Chartered Accountant, Chartered Certifi ...

or life insurance agent for advice. However, there is often vast differences of opinion between these professionals, even given the same starting conditions. This should not be surprising, given the huge future differences that even small variances in starting conditions can make. For example, assume that an individual is likely to owe $100,000.00 in taxes at death. If a

permanent life insurance 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 upon the death ...

policy with a $100,000.00

death benefit Death is the irreversible cessation of all biological functions that sustain an organism. For organisms with a brain, death can also be defined as the irreversible cessation of functioning of the whole brain, including brainstem, and brain ...

costs $1,000 per year (remaining level for life), and the life expectancy of the person is 30 years, then the following events could occur: * The individual could die early. In this case, it is unlikely that any alternative investment of the $1000 per year would have yielded the required $100,000.00 at death. * The individual could live much longer than expected. The individual could have built up a significant cash value within the policy, depending on investment selection. As such, the individual would have access to these cash values tax-free regardless of growth, provided it is set up properly. Since one normally does not know which of these will occur (see

adverse selection In economics, insurance, and risk management, adverse selection is a market situation where buyers and sellers have different information. The result is that participants with key information might participate selectively in trades at the expe ...

) calculations must be based on expected life expectancies for people of similar gender, physical condition, and behaviour.

Life insurance to shelter investment growth and income

In an attempt to achieve the "best of both worlds" (protection in the case of early death, and additional tax-protected returns in the case of long life), life insurance policies were created containing investment accounts having preferential tax treatment. This is most often done with a Variable universal life policy. See that article for some discussion of the tax issues.

References and Additional Resources

{{DEFAULTSORT:Life Insurance Tax Shelter Life insurance Tax incidence