What is the tax advantage of cash value in a life insurance policy?
The increase in the cash value is not subject to current income taxation. Cash value accumulates tax deferred. • What happens if I borrow the cash value for college funding or an emergency? When you withdraw cash value through a plicy loan, there are generally no income tax consequences, provided the policy is not a modified endowment contract. • How does a modified endowment contract (“MEC”) differ? MECs are life insurance policies that are considered to be more investment-oriented than non-MECs because the ratio of cash value to death benefit is higher than in typical non-MEC life insurance policies. As a result, unlike with non-MEC policies, policy loans, assignments and surrenders of cash value are generally taxable on an income-first basis. Additionally, distributions poior to age 59½ are subject to a 10% penalty tax on any gains. Death benefits, however, are generally received by beneficiaries income tax-free, the same as non-MEC policies. • Are there any drawbacks to borrowing t
