Discover the living benefits of life insurance for income, protection, and growth.
Life insurance can address a multitude of life’s concerns. The death benefit is especially helpful in providing a replacement for lost income to your family, covering estate settlement costs, including estate taxes, or providing liquidity for business buy-outs. But specific policies offer more than just the death benefit. Permanent policies can provide for an accumulation of cash value, and that cash can often be used for the insured’s lifetime needs, including supplemental retirement income.
Retirement planning is often focused on current taxation – maximizing pre-tax contributions and tax-deferred accumulation. But retirees are often shocked by the toll taxes can take on their investment portfolios when it comes time to access the money. In addition to a death benefit, life insurance can provide living benefits and tax-free access to cash value, which can be part of diversification in retirement planning.1
A diversified strategy will consider:
- Taxes and tax rate changes
- Tax-deferred growth
- Tax impact on growth, distribution, and benefits; comparing after retirement taxation with current taxation
How does it work?
When we look at saving for future goals and needs, there are generally three income buckets of wealth to consider — taxable, tax-deferred, and tax-free. Each has advantages and disadvantages, but overall, taxes can significantly impact the amount of income available in the first two buckets. And since no one knows precisely where tax rates will be fifteen or twenty years in the future, it is often difficult to estimate how much income will even be available from those buckets in retirement.
How can life insurance help?
For those interested in the death benefits life insurance provides, permanent policies can have unique characteristics and tax advantages that also make them a smart addition to an overall retirement savings strategy.
- Policies can be structured for cash value growth over time.
- The cash value grows in a life insurance policy tax deferred.
- Withdrawals from a policy are made basis first, so no tax is due when withdrawn.
- Loans on the policy are also not subject to tax at the time of receipt.
- The income stream can be stopped any year the owner doesn’t need it
Considering today’s market and tax environments, insurance for both death benefit and supplemental income can play an essential part in a smart asset mix for appropriate clients. The key is to work with an insurance professional to assess the role of life insurance in the plan and design the best policy to suit the need. The comfort in knowing there will be enough income planned in retirement to allow for a comfortable lifestyle can go a long way in helping people live their lives to the fullest today!
1Loans and withdrawals reduce policy cash value and death benefit, may cause the policy to lapse, and may have tax consequences. If the policy lapses or is surrendered, there may be ordinary income taxes on gains. If your policy is overfunded, it may become a Modified Endowment Contract (MEC). Policies that are structured as MECs do not have the same tax advantages as non-MECs and are not suited for this purpose