One-third of consumers unaware of life insurance tax benefits, says study

Nearly a third of Americans do not realize that they can save on taxes through life insurance, according to a new study by Assurance IQ. Experts suggest this can be a missed opportunity to save money, especially at a time when most consumers are looking to save.

“Many Americans are stretched thin financially, which makes financial and insurance literacy critical,” Tim Hoolihan, life insurance sales manager at Assurance IQ. “If you mistakenly believe your family will pay income tax on a life insurance death benefit, you might end up paying for more coverage than you need.”

Christopher Bertinelli, Lenox Advisors VP of Asset Management, added that life insurance can “help you and your beneficiaries manage tax consequences to a certain degree.”

“Most people probably don’t consider their life insurance policies when tax season rolls around. Perhaps they should,” he said.

“When you fully understand the insurance products you have, you can make decisions that better protect your finances long-term,” Hoolihan added. “It’s important to consult a tax advisor to understand your potential tax liabilities.”

Consumers unsure about tax benefits

Assurance IQ’s study found 30% of consumers “believe they would owe taxes on a death benefit,” while 36% were unsure whether they would owe taxes or not.

“Insurance can be overwhelmingly complex, and our research makes it clear that people don’t fully understand it,” Hoolihan said.

He clarified that, in most cases, life insurance payouts are not subject to income tax except for in some cases where estate or gift taxes may apply.

“This means that if you pass away, your beneficiaries would be able to use the entire payout to cover your final expenses, pay off debt or to maintain their standard of living,” he said.

Tax benefits before death

Hoolihan also suggested that some Americans may not be aware of the ways a whole life insurance policy can offer tax benefits during their lifetime, through cash value growth.

“Cash value grows over time, and unlike in a savings account, the interest is tax-deferred,” he said. “You can access this cash value while you are alive without tax consequences, though you should consult your insurance professional to ensure you’re structuring it correctly.”

As an example, he explained that a policyholder could use cash value to pay their policy premiums — which Assurance found 29% of Americans plan to spend tax returns on.

Amid skyrocketing rate hikes for home and auto insurance across the U.S., J.D. Power noted a trend of more Americans choosing to go uninsured because they can no longer afford premiums. In this economic climate, Hoolihan commented on the financial benefits of being able to take advantage of cash value.

“If you need a loan, you can also borrow against the cash value of your whole life insurance without needing approval from a bank or impacting your credit score,” he added.

Other tax advantages in insurance

American consumers may not be aware of the tax benefits in other areas, such as medical insurance or P&C insurance, Assurance’s research found.

For example, Assurance found 49% of American consumers are unaware of the tax advantages of a medical insurance savings account.

“People typically buy insurance to protect what matters most, like their health, home, and family’s financial future. But clients have varying levels of insurance literacy,” Hoolihan noted.

High-earning Americans were most likely to be “extremely familiar” with the tax advantages of a medical savings account. However, even then, just 15% said they were aware. Among lower-earning Americans, who earn less than $50,000 per year, 38% were not aware.

Age demographics did not vary much, however. Fifty-three percent of Gen Z Americans were not familiar with tax benefits of medical insurance, but so were 47% of Millennials, 53% of Gen X and 47% of Baby Boomers.

The study did not provide data on the tax benefits in P&C insurance, which are not usually tax-deductible. However, Kate Long, Assurance IQ consumer financial wellness advocate, noted that there are some exceptions Americans, and especially business owners, should be aware of.

Promoting ‘insurance literacy’

Experts suggest the lack of awareness about the tax benefits of life insurance could be an opportunity for financial professionals to ensure their clients understand the ways they can maximize savings.

“Too many people are not taking advantage of this super-powerful financial vehicle simply because most people don’t know it exists or don’t understand it,” Kevin Ross, financial advisor at Cape Securities, Inc., said. “There is a learning curve, and the best thing you can do is have a professional help you.”

“Insurance agents and other financial advisors have a significant opportunity to educate customers and provide them with personalized guidance so they can make informed choices and, ultimately, better protect their financial security,” Hoolihan added.

Assurance IQ is an insurance company and software solutions provider based in Seattle. Its study was conducted from January 26-29, 2024, with results weighted to reflect the U.S. population.

Rayne Morgan is a content marketing manager with PolicyAdvisor.com and a freelance journalist and copywriter.

© Entire contents copyright 2024 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.

Rayne Morgan is a journalist, copywriter, and editor with over 10 years' combined experience in digital content and print media. You can reach her at rayne.morgan@innfeedback.com.