Supplementing Retirement through Life Insurance
Insurance as an Asset
Insurance as an Asset
The right cash value insurance plan offers a variety of advantages in retirement.
The concept of using life coverage to supplement retirement might seem foreign. However, a properly executed life coverage contract can be a very reliable tax-free wealth accumulation and distribution tool that should be a piece of an overall holistic financial plan.
Permanent life coverage contracts often get compared to the ROTH IRA due to their tax free nature. Yet these cash value plans do not have the same sort of contribution limits, income restrictions, or early withdrawal penalties that traditional retirement accounts have.
More than anything else, this means that those who utilize maximum funded life coverage policies have options and benefits that others don’t.
In our opinion, any responsible financial plan includes a permanent life coverage policy in one form or another.
The fact is, life coverage can be one of the most versatile retirement tools available. A portion of the premiums paid on permanent life coverage plans are separated into their own fund that can eventually be withdrawn or borrowed against tax-free.
Universal life insurance plans can be set up in such a way that make them an ideal chassis (best vehicle) to bank on yourself and supplement your retirement tax-free. The idea is to pay the maximum premium allowed every month in order to boost the growth of the cash value aspect of the policy.
Depending on your assets and income, a plan of this type might become an absolutely integral part of your overall financial portfolio.
In our experience, an alarming majority of coverage agents do not know how to structure a contract of this type. It is imperative to use someone with the proper knowledge and access to the best insurance companies available in order to execute this strategy.
Before diving head first into a life insurance policy, it’s important that you have a full understanding of what you’re getting yourself into.
Depending on the structure of your policy and the wealth accumulation strategy that goes along with it, there may be real risks associated with improper execution.
Overfund your policy and you might transform it into a “modified endowment contract”, which will lose many of the tax advantages your policy was set up for in the first place. Or, if your policy lapses with outstanding loans, you’ll be taxed on everything over the amount you put into the policy.
Also, while the overall fees in a life coverage contract are generally much less than a managed account in the long run, the fees are front loaded into the policy making it a poor short term strategy. If short term liquidity is the goal, a client will often be better served by “buying term and investing the difference.”
Life insurance is hands-down the best way to provide financial security for your family. However, if you choose a plan for a reason other than the death benefit, make sure that you are certain you understand and can execute on the strategy behind your maximum funded life coverage policy.