Yes, there are several tax benefits associated with Infinite Banking when implemented using a dividend-paying whole life insurance policy. These tax advantages contribute to the overall appeal of the strategy.
Some of the primary tax benefits include:
Tax-deferred cash value growth: The cash value in a whole life insurance policy grows on a tax-deferred basis, meaning you won’t pay taxes on the interest, dividends, or capital gains within the policy as long as the policy remains in force. This allows your cash value to compound more efficiently over time.
Tax-free withdrawals: You can make tax-free withdrawals from your policy up to your cost basis, which is the total amount of premiums you’ve paid into the policy. This provides a tax-efficient way to access your cash value for various financial needs or emergencies.
Tax-free policy loans: When you take a policy loan against your whole life insurance policy, the loan proceeds are generally not considered taxable income. This means you can access your policy’s cash value through a policy loan without incurring taxes on the borrowed amount.
Tax-free death benefit: The death benefit paid out to your beneficiaries is generally income tax-free, ensuring that your loved ones receive the full amount without having to worry about taxes. This tax advantage helps preserve the value of the financial legacy you leave behind.
It’s important to note that the tax benefits associated with Infinite Banking are subject to certain limitations and regulations. For instance, if your policy becomes classified as a Modified Endowment Contract (MEC) due to overfunding, policy loans and withdrawals will be subject to taxes on a last-in, first-out (LIFO) basis, and there may be additional penalties if you’re under the age of 59½.
Additionally, if you surrender or lapse your policy with an outstanding policy loan, the loan balance could be considered taxable income.