I have a CWL that pays annual dividends. I have couple of option regarding what to do with the dividends.
option 1) Invest in PaidUpAdditions (PUA). My advisor said to keep it that way and if needed you can withdraw it tax-free.
Option 2) is to take out as cash directly but he said that would be taxable.
I am curious as to why the second option is taxable but the first one is not. In both cases I am taking out money but in the first option (PAU route) it a 2 step process.
Regarding your question, the reason for the tax difference is that with Paid-Up Additions, you’re essentially increasing your policy’s cash value, which can be accessed tax-free. Taking cash directly counts as income, hence the tax.
thanks for your explanation. it’s counterintuitive but makes sense.
With the second option, you don’t pay taxes until you get back more money than you put into the policy. The government sees this as getting your money back. This isn’t a bad thing about the company; it’s just a helpful tax rule.
Paying extra premiums is a good idea. It can make a big difference. Ask your agent to show you how much you could get with each option. Then you can choose the one you like best. You can change your mind later.
What’s the impact on the death benefit, if you take out the PUAs later? In other words, do you lose the entire additional DB that it bought? If you’re planning to take out PUAs eventually, wouldn’t it be beneficial to do it immediately?
The second option isn’t completely right! You can take out money up to the amount you’ve paid in, and you don’t have to pay taxes. For example, if you’ve paid $30,000, you can take out up to $30,000 no taxes! It’s better to borrow money from the policy, though.