LIFE INSURANCE FOR RETIREMENT INCOME

​Why would anyone in his or her right mind use permanent life insurance to supplement retirement income, especially when they have a 401k or 403b plan and/or IRA's?

​There are a few reasons.

First, all the above mentioned are tax-qualified plans which means they are governed by the IRS. There are rules that must be followed. If they aren't followed, there are penalties. For example, there are limits to how much can be put in them and taking the money out must begin between the ages of 59 ½ and 70 ½.

Perhaps as important or maybe more important, they will all be subject to taxation before receiving any money. That's not counting penalties if the money is accessed outside the window mentioned above.

Life insurance is not a tax qualified plan.

That means the rules stated above do not apply. Perhaps someone wants to retire prior to age 59 ½ or maybe they're not sure they ever want to retire and if they do retire, they're not sure when. Additionally, maybe they want to be able to create a larger retirement fund than what is allowed by the IRS. Lastly, when and if it comes time to access the money, they don't want to have to pay taxes on it.

Pay Tax on the seed instead of the harvest

Because it's a non-tax-qualified plan, premiums are paid with after-tax dollars rather than pre-tax dollars. Premiums are not tax-deductible. On the other hand, because premiums are paid with after-tax dollars, the policy can be structured so that there will be no more tax whatsoever. Therefore, the after-tax premium is the seed which has already been taxed. The cash value accrued within the policy is the harvest.

A real-life example

If a non-smoking male, age 40, who's in good health buys a permanent life insurance policy that has a $100,000 death benefit, his monthly premium would be in the neighborhood of $115. Yes, he could buy a term policy for much less but that is a topic for a different discussion.

At age 65

If he decided to put $300 per month in the policy instead of $115 until age 65 (a total of $90,000), he could and it would look something like the following: If he died at age 65, there would be a death benefit of $340,015.

If he lives till age 101

However, let's assume he lived until age 101 and stopped paying money into the policy at age 65 and only wants to take money out for the rest of his life. He could take out $20,250 in loans every year (35 years) for a total of $708,750 Tax-FREE! Assuming he dies at age 101, after all the loans had been repaid from the policy there would still be a Tax-FREE death benefit of $5,000!

Remember, not only has he taken money out for 35 years, he only put money in for 25 years and hasn't paid one cent into the policy since beginning to take money out.

Think about that.

This is only one example. There are countless other possible scenarios. Have you checked to see how it could work for you? If not, you're missing out.

Nothing against tax-qualified plans

This is not meant to bash tax-qualified plans. They have their place, especially if an employer match is involved. It may make sense to consider either re-allocating some of what is being put into a tax-qualified plan, particularly anything over and above a match, or consider restructuring a retirement plan altogether.

Final thought

There are several advantages to using a non-qualified plan such as life insurance either to supplement a retirement plan or to solely be a retirement plan. Not only is there more flexibility as far as how much money can be put in, when it can be taken out; the tax favorability adds to the attraction. Lastly, when it's all said and done, we're all going to die someday. The life insurance policy will continue to serve even after death--tax-free.

Insurance can be complicated, but it doesn't need to be. Connect with a licensed insurance broker at AllCarePlans for a complimentary consultation and needs analysis to get the coverage that suits your needs. ​