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Maximizing Your Tax Refund: Is Life Insurance the Right Choice?

Buying life insurance with your tax refund could be a great use of an annual windfall. If the unthinkable were to happen, your policy could provide your loved ones with much-needed financial support. Some policies also accumulate a cash value you can draw on for extra income. Using your tax refund to invest in life insurance has its pros and cons. Here are some important things to consider before making a decision.

Pros of Using Your Tax Refund to Buy Life Insurance

Pay Your Annual Premium With One Payment

The average cost of a 20-year term life insurance policy for a 30-year-old policyholder is about $30 per month, or $360 per year, according to Policygenius. The price you’ll pay depends on your coverage, age, and health, but some insurers offer pay-in-full discounts. That means you could save money in the long run by paying for a year’s worth of coverage upfront.

You’ll still want to prepare your budget so that you’re ready for the following year’s payment, especially if there’s a chance you won’t receive an adequate tax refund. You can use sinking funds to save little by little.

Reduce Your Monthly Expenses

On top of the potential savings, paying in full removes the burden of having to make monthly premium payments. That decreases the odds of missing a payment, which could put your policy in jeopardy. Using your tax refund to buy life insurance can also create some wiggle room in your budget and free up money to put toward other financial goals—whether that’s building your emergency fund or paying down debt.

Use Your Tax Refund for Something Worthwhile

Even with the best intentions, it can be hard to use a cash windfall wisely. Putting some of that found money toward a life insurance policy is a good use of your money. A strong policy can provide peace of mind and ensure that your loved ones would be taken care of if something were to happen to you. There are two main types of life insurance policies:

• Term life: Lasts for a predetermined amount of time and provides a death benefit if you pass away during that period.
• Permanent life: Typically lasts a lifetime (as long as you pay the premiums) and also accumulates a cash value that grows tax-free over time. Permanent life insurance is more expensive than term life insurance.

Strengthen Your Retirement Nest Egg

The cash value that builds in a permanent life insurance policy earns interest and can provide income on an as-needed basis. When you’re retired and no longer working, it can be reassuring to know that money is there if you need it. This cash value can be used to cover regular expenses or get you through a financial emergency. You can borrow against your cash value and pay it back, or choose not to repay the funds, though this will reduce your policy’s death benefit. Any unused cash value will revert back to the insurance carrier after your death.

Cons of Using Your Tax Refund to Buy Life Insurance

Tax Refunds Aren’t Guaranteed

Getting a tax refund one year doesn’t mean they’ll continue every year after. If you pay too much in taxes throughout the year, you’ll get that overpayment back in the form of a tax refund. That might happen if your tax withholding is too high. (This is the amount that’s withheld from your paycheck to cover federal income tax.) If you’re self-employed, you might overpay your quarterly estimated taxes.

Depending on your tax liability and how many tax deductions and credits you qualify for, you could end up with a smaller tax refund in the future—or owing money to the IRS. If you can’t afford to continue paying for life insurance, your policy could be canceled.

It May Not Be Enough to Cover All Your Premiums

The average tax refund for the 2022 tax year was $2,753, according to IRS data, but every taxpayer is different. It’s possible that your tax refund will fall short of your life insurance premium. If that happens, you’ll want to make sure there’s room in your budget to cover the difference. Stretching yourself thin financially could cause you to accumulate debt.

Your Money May Be Better Spent Elsewhere

Depending on your situation, your tax refund could help stabilize your finances. You might put this money toward:

• Paying down debt
• Building your emergency savings
• Buying a home
• Saving for retirement
• Investing
• Starting a business

Another option is splitting your tax refund between multiple goals, which may or may not include buying life insurance.

How to Save on Life Insurance Premiums

It’s possible to find adequate coverage without breaking the bank. Here are some simple ways to save money on life insurance:

• Adjust your coverage: One rule of thumb is to choose a death benefit that’s equal to 20 or 30 times your annual salary. But depending on your needs, you might feel safe trimming your coverage.
• Opt for term life insurance over permanent: If you’re relatively young and healthy, a term life insurance policy could cost much less than a permanent policy. Your plan won’t accumulate a cash value, but you’ll still be covered if the unthinkable were to happen.
• Shop around: Every life insurance carrier and policy are different. Comparing plans and coverage could help lower your premium. You can shop around on your own or work with an insurance broker.
• Buy life insurance when you’re younger: Life insurance tends to get more expensive as you age. You could lock in an affordable premium by purchasing a term policy sooner rather than later.

The Bottom Line

Receiving a tax refund could allow you to buy life insurance. You may get a discount for paying in full—and peace of mind knowing you’re covered. But depending on your situation, it might make more sense to put a cash windfall toward other financial goals.

For many, life insurance is a central part of financial planning. The same can be said for maintaining strong credit. Whether you’re applying for a mortgage, credit card, or personal loan, your credit score will be a deciding factor. You can check your credit score and credit report for free with Experian.

If you’re considering buying a home or refinancing your mortgage, O1ne Mortgage is here to help. Our team of experts can guide you through the process and find the best mortgage solution for your needs. Call us today at 213-732-3074 for any mortgage service needs. We look forward to working with you!

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