A Single Vehicle That Can Provide Tax-Free Growth Now & Tax-Free Income Later
In recent years, the idea of using life insurance contracts as a means of supplementing retirement income has become increasingly popular. The growing popularity of Life Insurance Retirement Plans (LIRP’s), or Life Insurance Asset Accumulation Plans (LIAAP’s) can be attributed to several factors.
- As the future of Social Security has become less certain, people have become more certain that they need to save for their own retirement.
- Tax law changes have reduced the amount highly compensated employees can contribute to their qualified retirement plans. The contribution maximum is now based on the first $150,000 of compensation only. Corporate downsizing has reduced people’s confidence in company retirement plans.
- In general, Cash Value Life Insurance is becoming increasingly recognized as offering one of the most flexible ways to grow and to access accumulated assets (under proper procedures) — income tax-free.
Here are some of the key reasons why a CASH VALUE Life Insurance contract can serve as a particularly attractive asset accumulation and distribution vehicle:
1. You can maximize its cash value build up:
One of the key benefits of accumulating retirement assets within a life insurance contract is that those assets grow tax-free now and can be accessed tax-free later. Better still, to “qualify” for that tax-free access you only have to purchase a minimum amount of life insurance. This approach, referred to as “max funding” the contract, uses less of the growth/gains to pay for insurance and leaves more to continue compounding, tax free within the contract. Note, that to reap the real benefit of this approach, one should consider funding their Life Insurance Asset Accumulation Plans (LIAAP) until age 65 or even Age 70, and if starting a plan later in life you may want to “force feed” or contribute as much as possible in the early years of the contract (i.e. 5-7 years) to build up cash value even faster (avoiding a MEC, or over-funded policy, so that you are not taxed on later withdrawals).
2. Certain Types of Cash Value Plans Offer Greater Policy Values Protections & Options at Conversion into Tax-Free Retirement Income:
A LIAAP provides a very flexible source of tax-free income. Unlike 401(k)s and IRAs, there are no penalties for withdrawals before age 59 1/2 – and no minimum distributions required beginning at age 70 1/2. There are also several ways to access LIAAP assets. First, you can simply withdraw assets tax-free up to your cost basis and after that, you can take “wash” or no-cost or low cost net loans against the policy’s value. Many policies assess a charge on outstanding loans but also credit the same or nearly same interest rate back to the contract’s cash value during the loan so there’s essentially little to no net cost to borrow money against the policies accumulated/saved cash values.
Like other types of retirement plans, a LIAAP offers you the opportunity to participate in the growth potential of the insurance companies underlying investments through dividends or some other interest crediting method, and without estate tax or even income tax, if growth is taken out of the contract in a proper manner. Also, once you retire you may be able to switch policy values into more conservative positions towards supporting greater principal protection and income needs. The point is that these kinds of fully funded policies offer greater flexibility and options as one’s needs change over the many years the policy is in effect.
3. The plan can also “self-complete” if something happens to the insured owner:
Rather than being a negative, the life insurance component of the plan offers a real advantage ensuring that if you die prematurely your financial plans can still be fulfilled. The insurance benefit that is passed income tax-free to the beneficiaries can be used to “complete” the process of funding the additional goals the contract may have initially been established to address (debt pay off; creating an Estate; gifting; creating an income generating resource; paying off an outstanding Mortgage; etc.).
[IMPORTANT DISCLAIMERS & DISCLOSURES: Life insurance policy cash values are accessed through withdrawals and/or policy loans. Loans are generally not taxable. Withdrawals may be taxable under some circumstances. Unpaid loans and/or withdrawals will cause a reduction in the policy cash values and death benefits. Please consult with your tax advisor for advice regarding your particular situation. Life insurance policies and contracts contain exclusions, limitations, reductions of benefits and terms for keeping them in effect. Paul M. League, QFP, CFP® (800.482.5347), as a licensed professional, can provide you with the cost and complete details. Availability varies by insurance carrier and by state].
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