company Life insurance is a promise between the policy owner and the insurance company. A life insurance policy is expected to perform many years into the future; therefore the long-term financial viability of a firm is important when selecting an insurance company. The credit rating of an insurance company can be used to determine the financial health of an insurance company. Taxation Taxation of cash value The cash value of a juvenile life insurance policy can be borrowed or withdrawn at any time. Borrowing using the policy as the sole collateral is typically not a taxable event, although interest must be paid or accrued. A withdrawal up to the cumulative premium (also known as basis) paid into a policy is not subject to taxation. Withdrawals over the cumulative premium are taxable in the year that the money is withdrawn. If money is intended to be withdrawn, the policy is often transferred to the juvenile, who generally is in a lower income tax bracket than the policy owner. Taxation of death benefit Death proceeds of a juvenile life insurance policy are received by a beneficiary of the insured free of income tax. Proceeds are included in the estate of the deceased and may be subject to estate tax if the policy is not owned by a trust. Use of trusts Trusts are used extensively in conjunction with many forms of life insurance. A trust, such as a Crummey trust, allows for the cash value of a juvenile life insurance policy to be withdrawn and used without incurring federal or state income tax. For example, a Crummey trust for the purpose of paying for college and providing lifetime benefits could function as follows: Parents create a Crummey trust for the purpose of providing for a child’s health, education, maintenance or support. Parent A writes an annual check under the gift tax exclusion amount to the Trust for the insurance premium due. Parent B is the trustee authorized to administer the trust assets. The beneficiary must be given a chance to claim the gift of the premium. However, since the beneficiary is a minor, Parent B has 30 days to ‘claim’ the funds (on behalf of their child). Parent B signs a release to state that the funds will not be claimed and after 30 days the funds pass to the trust without any further action by either the parent or beneficiary. Trust