When a life insurance policy’s cash value grows beyond a certain threshold, the policyholder may be subject to taxes on the growth, even if they haven’t received the funds. This taxable growth is referred to as the policy’s inside buildup. A tool designed to estimate this potential tax liability helps individuals understand and plan for this often overlooked financial aspect of certain life insurance policies, particularly those with substantial cash value accumulation. For example, a policyholder with a large universal life policy could use such a tool to project potential tax implications several years into the future.
Understanding potential tax liabilities associated with certain life insurance policies is crucial for comprehensive financial planning. Projecting this tax burden allows policyholders to make informed decisions about their coverage and investments, potentially mitigating unexpected tax bills and optimizing long-term financial outcomes. Historically, this aspect of life insurance has not always been clearly understood, leading to potential financial surprises for some policyholders. Tools that help clarify this complex area of personal finance offer valuable support for both financial professionals and individuals.
