Tax Diversification With The Whole Life Insurance

By Author: Mary Rose Somera
Total Articles: 94
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Many people want to achieve a diversified tax base in today’s ever-changing retirement landscape — a portfolio of financial assets that offers various types of income tax advantages. Life insurance can help with that strategy.

Numerous things are on the table as we begin a period of potential tax changes, including higher capital gains taxes and a reduction in the estate tax exemption. In addition to the tax benefits that life insurance has historically provided, a properly structured life insurance contract can help mitigate such tax policy uncertainty.

The primary purpose of life insurance is protection — assisting loved ones in carrying on in the event of an untimely death. Whole life insurance has tax-advantaged features that can supplement other retirement savings vehicles.

Tax planning is often overlooked in retirement planning. 401(k)s, IRAs, and SEPs hold most retirement assets. All of these are regular retirement income. As retirees, we lose many tax deductions, such as pre-tax savings, claiming children as dependents, and not having a paid-off home. Diversifying retirement income is crucial.

Tax-Deferred ...
... Accumulation

Permanent life insurance accumulates cash. Whole life insurance has a guaranteed cash value growth rate. Variable universal life insurance can earn returns on investment accounts. Some life insurance policies can earn dividends, which can boost coverage and cash value.

Taxes aren’t due on cash value until it’s withdrawn. The premium plan determines growth rate.

Some whole life insurance policies can be paid up with 10 premium payments, building cash value quickly. The premiums for such a policy are higher than for other whole life insurance policies with longer payment terms. Some policies spread premiums over a policyholder’s 100-year lifespan. Pay-to-age-100 policies have lower premiums than 10-pay policies, but cash value grows more slowly. There is no minimum distribution age like a 401(k) or IRA.

Tax-Advantaged Access

Life insurance cash value withdrawals or partial surrenders are tax-free up to the “cost basis.” Out-of-pocket premiums are this amount. It doesn’t include tax-deferred gains or dividends. 1 Insurance cash value loans may have lower interest rates than personal loans.

The cash value of their policies can be withdrawn or borrowed against for any purpose, such as covering a college expense or a down payment on a home. Additionally, there is no penalty for withdrawing cash value prior to age 59 1/2 unlike most retirement accounts.

A whole life insurance policy can be a helpful tool in a comprehensive strategy for generating retirement income because of its cash value feature.

Many retirees rely on long-term savings invested in equity markets. Retirees face challenges when markets decline. In a declining year, withdrawing from a retirement account can reduce its value. One or two years of negative returns early in retirement can damage the ability to withdraw the same amount of income later.

Retirees can use a whole life insurance policy’s cash value as a reserve for market pullbacks, giving invested funds time to recover.

Permanent life insurance provides tax-favored access to cash. This pool of assets can be used as a buffer against stock market conditions, a reserve for medical copays and prescriptions, and a retirement income supplement.

Social Security Options

By taking partial surrenders first, retirees can delay starting Social Security. Social Security benefits increase with delay.

As a tax-free withdrawal or loan, life insurance income is not included in Social Security tax calculations.

All the above features are secondary to life insurance’s main purpose: protecting loved ones. Life insurance death benefits are tax-free.

A tax-free death benefit can allow you to spend other assets in retirement without affecting your legacy.

Whole life insurance’s protection, accumulation, and access features make it a useful part of a savings and investment strategy and provide tax diversification of income sources.

Get More Information on Tax Benefits You Are Missing
The best way to learn which tax laws can benefit you most is to sit down with an expert and create a custom plan to build your wealth and minimize your tax obligations. If you would like more information, contact us today.