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The Power of Life Insurance
The Impact of Tax-Free Death Benefit
What is it?
Life insurance death benefit proceeds are generally received on an income tax-free basis. If the
life insurance policy is owned by an Irrevocable Life Insurance Trust, they can also be generally
received estate tax-free.
To match these results would require higher rate of return and possibly greater risk in an invest
that would be subject to income taxes or estate taxes.
How does it work?
Client
Cash Gifts to Fund Premiums
Irrevocable Life
Insurance Trust
(ILIT)
Life Insurance
Policy
Death
Benefit
Heirs
Premium
Payments
Life Insurance
Company
Any information in this report should not be used in any actual transaction without the advice and guidance of a professional Tax Advisor and/or Attorney. Although the information contained here is
presented in good faith, it is General in nature and may not be applicable to or suitable for the individual’s specific circumstances or needs and may require additional consideration of other matters.
This report is for informational purposes only. It does not constitute a contract or guarantee. Please refer to the insurance company full illustrations for complete details. Any information in this report
should not be used in any actual transaction without the advice and guidance of a professional Tax Advisor and/or Attorney. Although the information contained here is presented in good faith, it is
General in nature and may not be applicable to or suitable for the individual’s specific circumstances or needs and may require additional consideration of other matters.
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The Power of Life Insurance
The Impact of Tax-Free Death Benefit
Male 60, Preferred Nonsmoker, Female 60, Preferred Nonsmoker. Guaranteed SUL. 60
Premium Payment(s). State of PA. Death Benefit Guaranteed to Age 120. Guaranteed
crediting rate of 3.0%
You Pay
$9,862
Heirs Receive
$1,000,000
Annual
Premium
Death
Benefit
Annual Premium Payment Made Over 60 Yr(s)
Life Insurance Internal Rate of Return (IRR) at Death
- 5 Years
Life Expectancy
+5 Years
Age(s) 85 | 85
Ages(s) 90 | 90
Age(s) 95 | 95
9.59%
7.02%
5.31%
Calculating The “Taxable Equivalent Return”
What gross rate of return in an account subject to taxes would be needed to match the rate of
return of the life insurance?
Subject to: 20% Capital Gains Tax
- 5 Years
Life Expectancy
+5 Years
Age(s) 85 | 85
Ages(s) 90 | 90
Age(s) 95 | 95
11.82%
9.71%
6.59%
Subject to: 40% Estate Tax
- 5 Years
Life Expectancy
+5 Years
Age(s) 85 | 85
Ages(s) 90 | 90
Age(s) 95 | 95
15.90%
11.62%
8.78%
If the account was subject to both income and estate taxes then the return if needs to match the life
insurance IRR would be even higher then those shown above.
That’s The “Power of Life Insurance”
Taxable equivalent return calculated as the insurance IRR at death divided by 1 minus the tax rate. The tax rates
illustrated are purely hypothetical and for illustrative purposes only. The actual tax rate may be different.
Guarantees are based on the claims paying ability of the issuing insurance company
For illustrative purposes only, does not reflect an actual life insurance policy.
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