You don’t want your death to create a financial thicket for your loved ones. With life insurance, you can transfer wealth in a tax-smart way. Here are some examples in which life insurance proceeds are protected from taxes:

• Growth cash value. Permanent life insurance policies are designed to increase in value through investments. That growth isn’t counted as income and won’t be subject to taxation.
• Lump-sum payments. If you decide to surrender your permanent life insurance policy and the lump-sum payment is less than the money you put into the policy, your payout is also exempt from taxation.
• Investment dividends. Mutual insurance companies may return money to you in the form of investment dividends. The amounts aren’t taxed until they exceed what you’ve paid out in premiums.
• Taking care of your spouse. Life insurance payments to a spouse generally aren’t subject to federal income taxes. Your loved ones will receive your guaranteed life insurance payout without the major tax bite. That’s a guaranteed return on your premium payment.

Small businesses are the backbone of the American economy. There are over 30 million small businesses in the U.S. alone! If you own one of them, there’s a very good chance that you need life insurance. 

Life insurance isn’t just designed to protect your family—it’s also a solid strategy for protecting your business from crippling financial loss, liabilities, and instability. Having a life insurance policy is a key component for planning an orderly, economical transition.

• Buy some time while preparing for the next steps. What would happen to your business if you were to die unexpectedly? Could your business move forward without a hiccup? Life insurance benefits provide relief in the form of instant liquidity so that your business can meet ongoing financial demands.
• Collateral coverage. If you’ve taken out loans to grow your business and used family assets as collateral, those loans could become due upon your death. Life insurance helps protect those family assets until your loved ones can get back on their feet.
• Make up for lack of employee benefits. As a business owner, you may not have the benefits that come with being an employee, like company-sponsored retirement accounts, group life insurance, or disability insurance. Life insurance helps you cover those bases.
• Key person insurance policy. Lenders will generally require key person life insurance on anyone who is a vital part of your company. Having this policy can help protect your firm from going under in the event of your untimely death by paying out a tax-free death benefit to the company.
• Buy/sell agreements. Life insurance can fund a buy/sell agreement, also known as a business will. With a buy/sell agreement, you can help protect you and your company from the unexpected transfer of ownership. A buy/sell agreement defines the specifics of who will get what in terms of shares of the business, and having one can help gain favor when dealing with creditors.

As you can see, life insurance provides an invaluable financial safety net for business owners. The most salient benefit is securing the necessary short-term cash to keep operations running until things settle after your death. As a bonus, you can deduct your premiums as a business expense.

Permanent life insurance is a financial instrument that can hedge against market risk. 

• Cash value as an asset. One major perk is the cash-value component, which is designed to increase in value over time. That makes it a financial asset. Assets have clear financial benefits, like securing loans to build further wealth. You can build up a substantial nest egg over time as you pay your premiums—with tax and creditor protection, even in case of bankruptcy.
• Cash surrender value. If you surrender your policy, your cash value is tax-free up to your cost basis, or the sum of all your premium payments. Any amount beyond the basis is considered a gain and subject to ordinary income taxes.
• Access cash value on a tax-advantaged basis. Once your cash value has grown, if other options aren’t available, you can access needed funds through your policy. Money borrowed isn’t taxable so long as the amount is below your cost basis. You can use it to pay for college, a house, or even your premium payments. 
• Tax-free dividends. When properly structured, permanent life insurance can offer dividends, similar to traditional investment dividends. These dividends are tax-free because dividends are considered a return of policy premiums.

Universal Life (UL) policies give you a little more flexibility with both your premiums and your death benefit.  Your death benefit can be raised or reduced, thus adjusting the face value of your coverage and changing your premiums accordingly—without surrendering your policy. 

UL premiums tend to be lower, similar to those of term insurance. Premiums include two components:

1. Cost of insurance (COI) amount. This is your minimum premium payment required to keep your policy active. It includes several items bundled together into one payment: the charges for mortality, policy administration, and other directly associated expenses to keeping the policy in force. The COI amount is determined by your age, insurability, and the insured risk amount. 
2. Cash value. Any premiums collected over the cost of COI will accumulate within the cash value portion of your policy. As you grow older, your COI will increase. If sufficient, the accumulated cash value will cover the uptick in COI.

Just like a Whole Life policy, a UL policy can also accumulate cash value. Your UL policy’s cash value earns interest based on the current market or minimum interest rate, whichever is greater. 

As your cash value accumulates, you can access a portion of the cash value without affecting your guaranteed death benefit. You’ll be able to borrow against the cash value without tax calculations—however, interest will be calculated on the loan amount, and there will be a cash surrender fee. 

This policy combines Variable Life and Universal Life insurance by letting you send in premium payments anytime, as long as you’re within the minimum and maximum rules. Your underlying cash value is subject to how well your selected investments perform.

VUL policies combine the best of Variable and Universal Life characteristics. 

• Similarly to Variable life insurance – VUL policies allow you to invest your policy’s cash value on a tax-free basis. VUL has investment subaccounts, structured like mutual funds, that allow for the investment of your policy’s cash component. These subaccounts are legally treated as securities, and it’s worth seeking assistance from a Fiduciary Advisor.
• Similarly to Universal life insurance – your premium is flexible. Your investment returns are guaranteed by a minimum floor and maximum cap.

Some policies restrict the number of transfers into and out of the funds. If you’ve exceeded that annual limit, and your subaccounts have performed poorly, you may need to pay a higher premium to prevent the policy from lapsing.