Life insurance tax shelter


A life insurance tax shelter uses investments in insurance to protect income or assets from tax liabilities. Life insurance proceeds are not taxable in many jurisdictions. Since most other forms of income are taxable, 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.

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 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 policy with a $100,000.00 death benefit costs $1,000 per year, and the life expectancy of the person is 30 years, then the following events could occur.
Since one normally does not know which of these will occur 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", 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.