What are the Tax Benefits of Dividend Paying Whole Life Insurance?

What are the Tax Benefits of Dividend Paying Whole Life Insurance?

Dividend Paying Whole life insurance is a type of permanent life insurance that can come in many forms, but the general concept is that it provides coverage over your entire life. This means that when you purchase a whole life policy, you are purchasing a policy that provides financial protection for you and your family in case something happens to you.

A common misconception about dividend paying whole life insurance is that it’s only used as an investment vehicle although this is only partially true.  Many individuals and business owners are utilizing dividend paying whole life insurance for the many tax benefits it provides.

Tax-Free Retirement Savings Withdrawals

If your dividend paying whole life policy is designed properly you can withdraw funds at any time without paying additional taxes. Unlike other types of retirement plans such as a 401(k), with dividend paying whole life insurance policies you’re allowed to take out the full amount of what you’ve invested and the interest you have earned, and not pay any penalties, fees, or taxes.  You can use this money however you see fit—to fund a first home purchase, or for college tuition payments for your children or grandchildren.  Even if your policy’s death benefit is greater than its cash value, which means that there isn’t enough cash in the policy to cover all of its premiums plus interest earned on investments during its lifetime, there are no restrictions when it comes time for beneficiaries (family members) to receive distributions from their loved ones’ policies—the entire death benefit may be withdrawn without tax implications and used however they see fit.

Reduce the taxes you’ll pay on your Social Security benefits

The tax-free nature of your Social Security benefits is an important part of how the program helps you. If you take those benefits too early, though, it can impact your overall financial situation. It’s important to understand the rules around this so that you can make sure that your Social Security income is really helping rather than hurting you.

The most basic rule is that if you begin taking Social Security before age 62 (or full retirement age for those who are still working), any benefits are subject to taxation as ordinary income up until that point in time. For example, let’s say a 65-year-old man decides he wants to retire and start receiving his full benefit at age 65—a year earlier than he would have been eligible if he had waited until his own full retirement age (66). In that case, one third of his monthly benefit payment would be subject to ordinary federal income tax.

Tax-free death benefits

If you die, the cash value in your dividend paying whole life insurance policy is tax-free. You won’t have to pay income taxes on any of it, or on any interest, dividends or gains that have been earned over time.

Depending on how much money you put into a whole life insurance policy and how much interest they earn over time, this can be a very significant portion of your estate that will pass to your heirs free from federal income tax.

Tax-free cash accumulation

The cash value of your dividend paying whole life policy is a tax-deferred investment, which means that the interest you earn on it is not taxed as long as you keep it invested.

When you withdraw money from your policy (cash value), you don’t have to pay taxes on that either. This is especially beneficial if your in retirement and need to reduce your taxable income.  You’ll also be able to take out loans against your policy’s cash value tax-free.  If you need to make a large purchase in retirement you can take the money from your policy tax-free, as opposed to taking it from your 401k or IRA and paying the tax. This can have a tremendous impact on your overall financial plan.

Tax-free policy loans

You can also take out a loan against your policy. This is another tax-free feature, because you don’t pay any taxes on the money you borrow–the interest goes right back into the policy, which means that it’s not considered income. If you decide to use this option, be sure to check with your insurance company about how much of a loan they’ll allow and how much interest they will charge.  You can receive your loan as a one-time lump sum payment that can be directly deposited into your bank account within 5-7 business days.   There are no set repayment terms and you can payback your policy loans however and whenever you want.  


In conclusion, a dividend paying whole life insurance policy can be a good option to help you save for retirement or other important goals. It has several benefits that may appeal to you and your family, including tax-free withdrawals and death benefits. The main drawback is that the premiums are higher than with some other types of policies—but this cost may be offset by the fact that they last for your lifetime. Be sure to do your research before deciding whether whole life insurance is right for you!

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Financial Planning and Advisory Services are offered through Prosperity Capital Advisors (“PCA”), an SEC registered investment adviser.  Registration as an investment adviser does not imply a certain level of skill or training. Intelliplan Financial and PCA are separate, non-affiliated entities. PCA does not provide tax or legal advice.

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