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September is officially designated as Life Insurance Awareness Month by the nonprofit organization Life Happens. To this education campaign, we are highlighting six important things you should know about permanent life insurance.

1 – Life insurance offers tax benefits.

Permanent life insurance offers three primary tax benefits.

1. Tax-exempt death benefit – The death benefit paid by life insurance policies is typically exempt from federal income tax. This can make life insurance a valuable benefit for your loved ones.
2. Tax-deferred growth – The cash value of a permanent life insurance policy grows tax-deferred as long as the policy remains in effect. This tax-deferred growth offers the benefit of increased value accumulation over time. Tax-deferred assets can also benefit your retirement income strategy. Because tax-deferred assets are taxed as ordinary income when they are withdrawn, you may be taxed at a reduced rate if you fall into a lower tax bracket in retirement than you did during your working years.
3. Tax-advantaged loans and withdrawals – A permanent life insurance policy may allow you to access the cash value of your policy through tax-advantaged loans or withdrawals.
   • Loans – Some permanent life insurance policies allow you to borrow money from your policy’s cash value. The loan is not typically taxable as long as the policy remains in effect; however, you may be charged interest on the loan. And, if you fail to repay the loan, the outstanding balance will be deducted from your premium.
   • Withdrawals – If you withdraw a portion of your policy’s cash value, you typically do not need to pay taxes on the cost basis portion of the withdrawal. However, withdrawals of capital gains exceeding your cash value are taxable and may also be subject to a 10% early withdrawal penalty if you have not yet reached age 59 ½.

2 – Life insurance can enhance your estate planning strategies.

The proceeds from a permanent life insurance policy can provide liquidity to help your heirs cover estate tax liabilities, funeral expenses, outstanding debts and more. In addition, life insurance can help you provide equal inheritances to your various beneficiaries, especially if you have significant illiquid assets such as a business or real estate. For example, if you plan to leave your home to one child, you may decide to designate another child as the beneficiary of a life insurance policy that provides a payout similar to the value of your home.

3 – Life insurance can be used to support a loved one with special needs.

Life insurance can be used to fund a special needs trust (SNT) to provide for a loved one with special needs. By naming an SNT as the beneficiary of a permanent life insurance policy, the death benefit value is transferred straight to the trust following your passing. The trust can then be used to pay for your loved one’s care and support without impacting his or her eligibility for government benefits, such as Medicaid and Social Security Income (SSI).

4 – Life insurance can help maximize your charitable giving impact.

If your legacy goals include supporting charitable causes, a life insurance policy can help maximize your impact. There are several ways to use life insurance for charitable giving.

• Name a charity as the policy’s beneficiary. When you designated a charity as the beneficiary of your policy, the death benefit transfers to the charitable organization following your passing. The main benefit of this approach is that it allows you to retain control over your policy and its cash value because you can change the beneficiary at any time.
• Transfer your existing policy to a charity. Another option is to make an irrevocable transfer of your policy’s ownership to a charity during your lifetime. This allows the charity to decide whether to surrender the policy for its cash value, hold the policy or sell the policy. The benefit to you is that you are eligible for an immediate income tax deduction, assuming you file an itemized return. This strategy also removes the value of your policy from your taxable estate, which can help reduce your estate tax liabilities.
• Purchase a new policy in the name of the charity. You can provide a guaranteed death benefit to your charity by purchasing a new policy in the organization’s name and designating the charity as beneficiary. You would be responsible for paying ongoing premiums to maintain the policy, but you may be eligible to deduct these premiums as charitable donations.
• Donate policy dividends. If your life insurance policy pays dividends, you can elect to receive them in cash, then donate them to a charity of your choice. This strategy allows you to make ongoing charitable donations while retaining ownership of your policy.

5 – Life insurance can support you should you experience a chronic illness.

Some life insurance policies offer riders that allow you to use a portion of the death benefit to pay for long-term care expenses. This can be a valuable benefit if you experience an unexpected illness or injury. Some long-term care riders can help cover the costs of in-home or nursing home care, while others offer an accelerated death benefit (ADB) rider that allows you to receive a portion of your death benefit early if you are diagnosed with a chronic or terminal illness. This ADB benefit can be used to pay for medical bills and other costs of care.

6 – Life insurance can help ensure a smooth transfer of business ownership.

Life insurance can play a critical role in executing a businesses’ buy-sell order, as it provides remaining owners with the funds necessary to buy out the deceased owner’s share. The policy’s proceeds can help ensure a smooth transition with minimal impact on the business’ daily operations.

Life insurance can also be used to equalize your inheritance. If one child stands to inherit your business, you may decide to name the non-business-owning child as a beneficiary of a life insurance policy to help ensure both children receive an equal inheritance.

Could you use some help choosing a life insurance policy to meet your financial needs? 3C Wealth Management is here for you. Please schedule a call to learn more.