Life Insurance Offers Options for Retirement Savings
If you’re a professional, either self-employed or perhaps a corporate executive, you’re probably contributing to a 401(k) or some other retirement plan. Beyond that, you may be investing through an after-tax brokerage account in which you pay tax each year on your dividends and interest, and possibly capital gains tax if you sell an investment. Even though brokerage accounts are liquid and provide plenty of investment flexibility, these accounts aren’t tax efficient and they usually involve an awful lot of risk and volatility if you own stocks and bonds. In this blog we want to show you how a life insurance retirement plan can help you reduce risk and improve tax efficiency.
Many people don’t think about life insurance as a retirement savings vehicle and that’s a real shame. A properly structured policy can do wonders for your retirement plan. Life insurance:
- Provides an accumulation vehicle that can hedge against market risk: Stock and bond investments can be volatile. If you own individual stocks, there’s always a chance the companies whose stocks you own will go bankrupt and you’ll lose all of your money. Bonds are less risky, but they still trade in the market and are subject to credit risk, interest rate risk, reinvestment risk, inflation risk, and liquidity risk—not exactly a slam dunk. Life insurance, on the other hand, can provide an attractive rate of return, which can act as a supplemental income source during retirement.
- Creates tax efficiency: What happens when you take money out of a 401(k)? You pay ordinary income tax on it. This makes withdrawals from traditional (non-Roth) retirement plans pretty painful, especially if you retire into a medium or high tax bracket. If you invest in brokerage accounts, then you’re stuck paying tax both along the way and when the investments are sold. Loans from your life insurance policy are income tax-free. And, in the rare event that you pass away before utilizing your policy for income, your death benefit payout will be tax-free as well.
- Has no contribution limits: You can only contribute $19,500 a year to your 401(k), or $26,000 if you’re over age 50. That just isn’t enough savings to put together the sort of retirement fund you’ll need. Life insurance allows for much, much larger contributions—and they aren’t impacted by the contributions you make to your other accounts.
- Creates income: After many years of funding a life insurance policy, the cash value can be very significant. If you need to take income, you can do that through either a partial withdrawal or a tax-free loan from your policy. You don’t need to repay the loan since it will just reduce your death benefit in the future.
Life Insurance Does Double Duty for Retirement and Estate Planning
The beauty of using life insurance as a retirement savings vehicle is that you’re simultaneously creating and improving your estate plan. On the day you start funding that policy, you have a death benefit guarantee, even if that isn’t your primary purpose for the policy. Let’s say you buy a $2 million policy for a $20,000 annual premium and then die unexpectedly 15 years later. You will pass $2 million, tax-free, to your heirs after paying only $300,000 in premiums. If you happen to have a taxable estate at the time you pass away, the tax-free death benefit of the policy will provide estate liquidity and help pay any taxes that may be due.
Our advisors can help you find real solutions to the issues you face, such as putting together an efficient retirement and estate plan. Don’t give away your money to unnecessary income, capital gains, and estate taxes. Speak to us today and create a low-risk, tax-efficient strategy that will help you and your heirs keep more of the money they deserve.
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