How to Supplement Retirement Income using Cash Value Life Insurance

Under the current tax code life insurance cash values compound tax deferred which can be an appealing alternative to standard brokerage accounts because of the tax savings. Moreover, properly structured withdrawals and loans from a cash value insurance policy are tax free as long as the policy remains in force until the insured’s death. Maximum funded cash value life insurance policies can be a great solution for people looking to save money and supplement retirement income.

High Income Earners

The definition of a “high income earner” can vary but for the sake of this argument lets classify them as someone who cannot contribute to a Roth IRA because of income restrictions which is $135,000 for singles and $199,000 for married filing jointly. Basically, the government does not think people who make over these income limits should have the opportunity to invest in Roth IRA accounts which leaves “high income earners” searching for a vehicle where they can pay the tax now, have tax deferred growth, and tax-free distributions down the road. One solution for high income earners who want to squirrel away money for the future and have similar tax advantages to a Roth IRA is cash value life insurance. The only caveat is the person has to be healthy enough to purchase life insurance and their needs to be an “insurable interest”. The most common form of insurable interest is income replacement which works perfectly for a “high income earner” because they typically need a large death benefit. For the right situation and need cash value life insurance can be a great solution for people who are fortunate to make a great living.

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Product Design

If the goal is maximum cash value accumulation for a tax-free retirement income it is extremely important the policy is properly structured with the least amount of death benefit possible. Furthermore, it is crucial the policyowner sticks to the plan and funds the policy. Meaning if the person takes out a policy with a $20,000 per year premium for ten years, make sure to put the $200,000 into the policy during the ten-year period, otherwise the cash value will not match up to the original plan design. If something happens down the road and the policyowner cannot afford to contribute to the life insurance policy it is wise to reduce the death benefit to lower the overall policy expense charges.

Death Benefit and Accelerated Benefit Riders

Life insurance policies now have accelerated benefit riders that will pay out the death benefit before the insured passes away in the event of a qualifying event. These riders advance the death benefit and create liquidity while the insured is still alive if the insured has a qualifying terminal, chronic, or critical illness. It is prudent to meet with a knowledgeable independent insurance agent at least every three to five years to review one’s life insurance policy and make sure it is still the best solution.

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