Tax benefits of Whole Life Insurance

One of the biggest differences between this investment and many others is that all of the return on your investment is tax-deferred. You don’t have to pay any taxes on this gain until you withdraw it, unlike other investments for which you must pay a capital gains tax. An investment in whole life insurance becomes even more attractive when you consider the following:

• The portion of your premiums that goes toward purchasing your actual insurance reduces the amount of gain you realize.
• You pay taxes only on the difference between the total

gain and the total premiums paid, making the return on your investment significantly higher than if you had to pay taxes on the entire thing. (Even the capital gains tax is 20 percent, so if nothing else, you’re getting 20 percent more than if you put this same money in an interest-bearing savings account.)
For example, if you get a 5 percent return on a savings account of $10,000, at the end of the year you have $500. But you also have to pay 20 percent of that return in income taxes. In effect, you only gain $400 (20 percent of $500 is $100, which, subtracted from $500, equals $400). In contrast, if the $10,000 is in a tax-deferred account, such as a whole life insurance policy, with an interest of 5 percent, you gain all of the $500.
If you’re considering whole life insurance as a good way to invest, keep in mind that the rate of return you receive historically has been pitifully low, even adding the tax savings back in. Use the protection you’re buying, not the rate of return you get, as your basis for judging any type of life insurance as an investment.