Life Insurance: More Than “Just a Death Benefit”
Most people think life insurance only replaces a paycheck or pays off debt for loved ones. That’s important. But modern life insurance can also help with taxes, business continuity, and retirement income planning.
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Legacy & protection: Your beneficiaries generally receive a death benefit that’s excluded from federal income tax under Internal Revenue Code §101(a).
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Business continuity: Properly structured policies can fund buy-sell agreements, protect a key employee, and keep a small business alive if an owner or key person passes.
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Tax strategy: Cash value in certain policies can grow tax-deferred, and—if managed correctly—can be accessed with favorable tax treatment in retirement.
Why life insurance still matters in retirement planning
Yes, life insurance pays a death benefit. But for retirees and business owners, it can also act like a strategic tool: family protection, tax positioning, liquidity for your business, and even supplemental income planning if structured correctly.
1. Family protection & legacy
When you pass, your beneficiaries receive a lump-sum death benefit. Under current federal rules, those proceeds are generally excluded from taxable income as long as the policy wasn’t transferred in a way that triggers certain “transfer-for-value” exceptions.
- Why this matters: That money can replace lost income, pay off the house, handle final expenses, or fund education without forcing your family to sell assets at a bad time.
2. Business continuity
If you’re a small business owner, life insurance can be structured to:
- Fund a buy-sell agreement, giving partners the cash to buy out your share, so your family gets fair value and the company keeps running.
- Provide “key person” coverage so the company has money to survive the loss of a crucial owner or employee and recruit/transition without panic.
In 2025, advisors are pushing more owners to review their buy-sell funding because tax and estate rules keep evolving, and recent cases have highlighted that sloppy agreements can create surprise estate tax issues.
Potential tax advantages built into life insurance
Life insurance is one of the few tools that can offer income-tax-free benefits to loved ones, tax-deferred growth, and in some cases tax-favored access to cash while you’re still alive — if the policy is designed and managed properly.
Death benefits
- Generally income tax-free: A properly structured life insurance death benefit is usually excluded from the beneficiary’s federal taxable income under I.R.C. §101(a).
- Accelerated death benefits: Many policies let you access part of the death benefit early if you’re terminally or chronically ill; intended to qualify under §101(g) (often reported on IRS Form 1099-LTC) within limits.
- Note: Accelerated benefits reduce what’s left for heirs.
1035 exchanges
- Policy upgrade without immediate tax: §1035 allows certain like-kind exchanges of life insurance to new life coverage (or certain annuities) via carrier-to-carrier transfer.
- Why do it: Move from older/pricey coverage to modern designs (e.g., better LTC/chronic riders) while preserving tax deferral on gains.
- Heads-up: Exchanges can reset surrender periods and costs; we run comparisons first.
Cash value access
Permanent policies can build cash value with tax-deferred growth.
- Loans/withdrawals: If not a MEC and structured properly, policy loans can often be taken without immediate income tax.
- Fine print: Loans/withdrawals reduce cash value and death benefit; lapsing with a loan can create taxable income.
Used well, cash value can support retirement or LTC needs; used poorly, it can implode coverage.
Employer & group coverage
Group-term life often lets you exclude the first portion (commonly up to $50k) of employer-paid coverage from taxable income.
For owners, review ownership/beneficiary structure to avoid unwanted tax/estate outcomes.
How we work for you
We shop dozens of carriers for pricing, riders, underwriting flexibility, and guarantees that fit your goals — not a single company’s lineup.
We can also review existing contracts at no cost and consider riders, restructuring, or a compliant 1035 exchange when appropriate.
Before you buy (or change) a life insurance policy, ask these 5 questions
1. What problem am I solving?
Income replacement, estate liquidity, business buyout, or LTC/chronic care? The “why” drives the design.
2. Who owns it and who gets paid?
Ownership/beneficiary setup drives control and taxes — especially in business cases.
3. How are we funding long-term care or chronic illness?
Modern riders can accelerate a portion of the death benefit, often with favorable tax treatment.
4. What happens if I stop paying?
Loans/withdrawals reduce value; lapses with loans can trigger taxable income.
5. Can I improve what I already own?
Sometimes a §1035 exchange into stronger benefits beats buying new coverage net-new.
Let’s design your coverage the smart way
The right plan protects people you love, defends your business, and supports your retirement — while keeping taxes as low as legally possible.
Guarantees depend on the insurer’s claims-paying ability. Loans/withdrawals reduce cash values and death benefits and may cause lapse. If a policy lapses with a loan outstanding, the unpaid balance above your cost basis can become taxable. Withdrawals are generally income tax-free unless they exceed cost basis or the policy is a MEC. Consult your tax and legal advisors. Availability of riders and benefits varies by carrier and state.