24 July 2014 0 Comments

The Best or Worst Retirement Tool

shutterstock_143828704The primary purpose of life insurance is to provide a death benefit, not to build cash value.  Its main function is not to supplement retirement income.  With that said, however, life insurance policies have some advantages not offered by any other financial vehicles that can provide for a very efficient retirement resource.  They can also produce some of the worst results when improperly used.

First, for the good features:  cash values can be accessed from life insurance policies during your lifetime without creating any taxable income and without having any negative tax effect on Social Security retirement income.  Income received is even more tax efficient than tax free municipal bonds inasmuch as their interest may be free of income tax, but it does count when calculating tax on Social Security benefits.  Cash values of life insurance policies are received totally tax free by withdrawing to basis and then borrowing additional funds at a zero (or close to zero) net cost of borrowing.  At death, the remaining net death benefit is paid to beneficiaries free of income tax. No other financial vehicle has all of these tax advantages. 

Add to these advantages the features of Indexed Universal Life and you have the ability to accumulate funds using the upside potential of the market with downside protection in a bear market.

So, what can turn this best retirement income supplement into one of the worst?  Here’s what to be aware of:

  • Since there is a death benefit included, there are pure insurance costs of providing this protection, so if you have absolutely no need for insurance, these added charges may not be offset by the tax advantages.
  • Even if you can use insurance, the cost of insurance in these policies is much higher than term, so be sure to construct the policy with minimum death benefit possible for the premium paid.  Use term for any excess death benefit needed.
  • There are surrender charges if the policy is discontinued during the early years, so look at this as a minimum 15 year premium commitment.
  • Don’t overcommit today to a premium you may not be able to continue.  A sure way to lose is to start a policy, then stop it and jump to another policy.
  • Resist moving the money around in the various accounts available.  The index you select will probably be good for the long term…stick to it.
  • Don’t allow the policy to lapse before death or there will be tax on any cash—in the policy, withdrawn and borrowed—in excess of the premium paid.

If you’re ready to commit to a retirement plan, properly structured life insurance can be a great option…just do it right!

Coming up…the feel good factor.


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