Tax planning is the process of preparing for taxation and adjusting one's income and assets in order to pay the least amount of taxes possible. In the context of insurance, tax planning is especially relevant to life insurance because many life insurance companies offer investing and other options for income supplementation.
Income from life insurance can be subject to a number of different taxes. Death benefits, however, are not usually subject to state or federal income taxes. Many people try to set up their life insurance policies to avoid having to pay taxes, such as the gift tax or certain income taxes. The amount of money earned through life insurance policy investments can be quite substantial, so many people consider tax planning a very important way of avoiding losing significant potions of those earnings to taxes.
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