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The Tax Advantages of “Safe Zone” Life Insurance Policies
With “Safe Zone Life” insurance, you gain significant tax advantages. If the policy is utilized correctly, you aren’t taxed on the growth, and you can use it tax-free.
For this benefit, you pay tax on premium dollars before you put them in the policy.
Then, your cash value grows tax-deferred, so you don’t owe tax on the growth each year.
You can use the cash value through loans completely tax-free.
And when the death benefit is paid to your heirs, it’s completely income-tax-free as well.
It’s a triple-tax advantaged asset that you pay tax on the seed, but not the harvest.
However, there are two primary ways to trigger a taxable event inside of a “Safe Zone Life” policy, and both are avoidable.
One taxable event would be accessing cash value through withdrawals (different than a loan) above your cost basis (what you paid in).
The other taxable event would be if your policy becomes a Modified Endowment Contract (MEC) by having too little death benefit to support the infusion of cash.
If your policy becomes a MEC, the tax structure changes, becoming similar to a 401k or qualified plan, where you have to pay tax when you use your money.
Policies are monitored with MEC tests to raise the death benefit correspondingly, so you overfund up to the maximum without crossing the MEC line.
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