Typically considered two separate entities, many investors consider that retirement is for you, but life insurance is for your beneficiary. Many financial professionals consider life insurance as a solid plank in the retirement platform. Although somewhat controversial considering the cost of the product, drilling down can help support the plank in the platform theory.
Features & Benefits
When you purchase a permanent life insurance product, whether it’s Universal, Whole Life, a Variable product, or even a Hybrid, a portion of the premium goes into a separate cash account that accumulates value alongside or in addition to the stated death benefit in the policy. Other than the death benefit, the most important feature is that the policyholder can withdraw or borrow from the accumulated cash account. The funds are available in the event of a financial emergency such as loss of employment, but more importantly, these funds can be used to supplement a retirement plan. Always keep in mind, however, that outstanding loans will reduce the death benefit if remain unpaid. Just as important, there are tax advantages when you access the cash account in your life policy for retirement purposes. The distributions when borrowing from the policy are tax-free.
Advantages with a Cost
There are definitive tax advantages when you access a portion of the cash value to fund your retirement. For example, let’s say that you have $50k coming from a 401K each year and $25k in Social Security; that entire amount is considered taxable income. If the $50k were coming from life insurance cash value loans or partial surrenders, only the remaining $25k would be taxable. An additional bonus to this scenario would be that you would probably be in a lower income tax bracket, thereby making the $25k Social Security income less costly for tax purposes.
The cost associated with this scenario is rather obvious when you consider the fees that are loaded into the life insurance policy. But, you do however, get the advantage of having a death benefit available to your surviving loved ones where, with the IRA, such wouldn’t be the case. If you compare the cost associated with the life insurance at about 3% per year, that is significantly higher than the average annual costs of traditional investments that run about 1%.
Where You are Financially
Although the naysayers stand firmly against using permanent life insurance as a funding vehicle for retirement planning, they are typically the first to admit when other opportunities are maxed out, life insurance is the most legitimate way to go forward. This seems especially logical when you’re likely to have a life insurance need in the first place. If you are a senior with a high net worth, you’ll reap better tax savings from life insurance withdrawals than traditional investments.
The Penalty Box
It’s no secret that withdrawing cash from an IRA or 401K early can lead to significant penalties and tax liability, but such is not the case when you borrow from the accumulated cash account in your permanent life insurance policy.
Regardless of whether you are using a life insurance policy as a living benefit or death benefit, it is the only investment product that offers both benefits with favorable tax treatment, creates an instant estate, and becomes an integral plank in your retirement platform.