Efficient Tax-Free, Parity Funding

Efficient funding, tax-free funding, and parity funding are all terms used to describe that point in the life of the policy when you have an amount on deposit large enough so that tax-free interest earnings are sufficient to pay for the mortality and expenses of the contract in the current year.

Efficient funding, tax-free funding, and parity funding are all terms used to describe that point in the life of the policy when you have an amount on deposit large enough so that tax-free interest earnings are sufficient to pay for the mortality and expenses of the contract in the current year.

At this point, you are buying term life insurance protection entirely with interest earnings that have not been diminished by income taxes. This type of funding allows you to pay the minimum amount possible for the protection you desire.

For example, if you are in the 30 percent tax bracket, you have to earn $1.43 ($1.00 divided by the quantity 1 minus your income tax bracket) in order to pay an after-tax dollar for a term premium. But if you earn interest inside a policy, you use that whole dollar, undiminished by taxes, to pay the term premium within the policy. You save 43 cents on taxes for every dollar of premium paid in this fashion.