In this article I encourage readers to consider using
indexed universal life insurance for any of three different financial goals:
1) To start a flexible and “self-completing” college savings
fund to help pay for your children’s education 2) To create additional
(tax-free) income to supplement your retirement
3) As an alternative to long-term care insurance, since the
life insurance death benefit can be accessed to pay for assisted living or
nursing home costs, if needed.
Please note: I will ALWAYS recommend to my client that you
maximize your contributions to all “Qualified Plans” that you are eligible for
(401k, Traditional and Roth IRA’s, etc.) before you consider a financial
commitment to any form of permanent life insurance. Be wary of anyone advising
The single greatest focus of my business is in encouraging
my clients to take full advantage of the United States’ tax code’s exemptions
for life insurance.
A lot of people who I talk with aren’t aware that when we
pass away, our life insurance policy’s death benefit (the cash) doesn’t get
taxed when it’s paid out to our heirs. That is a great thing, and that’s why life
insurance is truly the best tax leverage available in our country’s tax code!
This means that life insurance is a way to turn small
amounts of taxable money (your policy’s premiums paid over the years) into a
tax-free windfall for your family. Because of this tax break, your family could
end up with hundreds of thousands of dollars more than you’ve ever had in YOUR
bank account, and it’s all tax-free to them.
But that’s just the beginning of my discussion about the tax
benefits of life insurance. Let’s go beyond the death benefit, and let’s talk
about the other tax-free features that make
cash-value life insurance a marvelous investment opportunity
By the way, this is where I get super-excited about life
The Perfect Investment
But first, let’s take a moment and daydream about how the
‘perfect’ investment might be structured.
We would want our perfect investment to be
TAX-DEFERRED. We would want all of our investment’s earnings (interest,
dividends, capital gains etc.) to accumulate tax-free.
Being tax-deferred allows compounding on a larger sum of money since no part of the investment is
subject to tax.
We would want NO LIMITS to the annual amount
that we could contribute to our investment. Currently,
we’re limited in how much we can contribute to our 401k’s, and our IRA’s.
We would want EASIER DISTRIBUTIONS of our money.
Currently, if we take money out of our Roth IRA’s before we hit age 59½ we get
a 10% penalty, AND we’d have to pay ordinary tax on the income! Ouch.
certainty-you want to remove both stock market
risk and tax risk
Accessible; take out the invested money at any
age we want, not waiting until we’re 59 1
Guess what? You can get all of these features with a certain
kind of life insurance called Indexed Universal Life.
Most people think of life insurance is something that pays
off after you’re dead. That’s true, but what if I told you that you could have
tax-free access to your life insurance
during your lifetime so you could use it for yourself?
You could begin moving large amounts of money from taxable
accounts into a tax-free permanent life insurance policy.
The money grows tax-free inside the policy. It’s harder than
ever today to make money on your investments so the last thing you want to do
is share any of your hard-earned gains with the government.
You don’t if those gains are earned within a life insurance
policy. If your money is going to grow it may as well grow tax-free.
Life insurance is an investment, but it’s better than your
typical investment accounts because it’s tax-free.
Life insurance comes with something else that you can never
get from the stock market: a guarantee!
But how much can you invest is up to you and the tax rules.
You might want to invest the maximum you can into the policy
if you’re approaching retirement (or already retired and looking to shelter
more of your taxable money into a tax-free vehicle).
The mistake most people make when approaching retirement is
trying to pay the least for the policy
because this is an investment–not an expense.
If you are saving money in a bank account would you want to
put in the most or the least?
You want to put in the most because this is your savings,
and you should look at indexed universal life insurance the same way, except
that the investment is tax-free.
So why would you keep money
growing in a taxable account when it can be transferred to a tax-free
If you have taxable IRA funds you can in effect convert your
life insurance paying tax now at low rates your distributions from your IRA and
then using that money to fund your life insurance investment.
That accomplishes two things you reduce your future tax
exposure in your IRA by taking distributions now and you build up a tax-free
source of retirement funds should you need them.
If it turns out that you don’t need to tap into your life
insurance for retirement income then the life insurance benefit builds for your
family, also income tax-free, and for
most people it will also be estate tax-free – depending on the estate tax
exemption level applicable when you die.