Agent Owner, Gilmore Insurance Services, Marysville, Washington State
Cash value life insurance from a mutual company, can gain interest if elected, but in doing so loses some tax advantages by choosing other options. Putting dividends in an interest bearing account with the policy creates a tax liability on the gain those monies earn. The most common way to avoid interest taxable gains on a policy is to elect paid up additions.
There are two permanent cash value life inusrance policies that use interest rates in their crediting method: participating whole life and current assumption universal life.participalting whole life uses a combination of interest rate returns and the return of unused expenses to create a dividend. Current Assumption universal life use interest rate crediting for both their current and guaranteed interest rates.
Term life insurance does not have any cash value. The only way term insurance pays out is if the insured person dies. Then it will pay the face amount of the policy to the beneficiary. Therefore, it does not gain interest.
Permanent insurance comes in variations of whole and universal life. Those policies do gain interest within the policy. However, some of this is offset by the cost of insurance, which is the cost of insuring your life. That is what separates life insurance from a savings account, and why tax benefits are given to life insurance.
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Permanent insurance comes in variations of whole and universal life. Those policies do gain interest within the policy. However, some of this is offset by the cost of insurance, which is the cost of insuring your life. That is what separates life insurance from a savings account, and why tax benefits are given to life insurance.