Using Life Insurance to Help Fund Retirement Needs

When properly structured, life insurance offers some decisive advantages. It can deliver liquidity, leverage, and flexibility. In a great many cases, the focus of life insurance is on the death benefit. Aside from using life insurance to create an estate or cover debts, it can fund future obligations and retirement needs.

Life insurance policies are either term or permanent. With the permanent policies, you can accumulate monies tax-deferred in what is referred to as the cash account. Simply put…you can fund future retirement needs by purchasing a permanent life insurance policy and focusing on making the cash account significant. You can then use the money in the cash account during retirement.

You buy your permanent life insurance policy with after-tax dollars. The gain of the monies within the cash account grows tax deferred. Moreover, when the life insurance policy is correctly set up and managed, you can get these monies out of the policy without paying any taxes, even on the gains in the cash account.

What happens is that a portion of the premiums you paid for your permanent life insurance policy goes into the cash account. You can obtain these funds, and they are not taxed. It is called return of premium (withdrawals). So, over the years, it is a total of $200,000. When into the cash account from premium payments, you can take out $200,000 tax-free.

For the growth in the cash account beyond what came from your premiums, you can take loans from your policy. Because they are loans instead of withdrawals, you do not have to pay taxes on them. You can repay the loans, or when you die, the loan amount is subtracted from the death benefit your heirs receive.

Case Examples[1]

The following three case examples provide some perspective on the results of leveraging the cash account in a permanent life insurance policy. 

Case example #1: Consider a 45-year-old man in good health receiving a preferred rating, making the insurance cost as good as possible. The premium is $50,000 annually. He makes the premium payments for 20 years until age 65. All told, he has paid $1,050,000 for the life insurance. He also has an initial death benefit of $1,253,349.

The monies in the cash account grow at a rate of 5.76 percent, and at age 65, he has $3,497,980 of life insurance coverage and $2,285,757 in his cash account. At age 66, for the next 20 years, he will have an annual tax-free income of $224,562, totaling $4,491,240. If he wanted to ensure he had money until age 100, he would take out $199,443 a year. Doing so would give him $6,980,505 total tax-free income.

Case example #2: A 48-year-old woman who is also in good health pays a $100,000 premium for ten years for $1 million. This gives her an initial death benefit of $2,647,354.

Growing annually at 5.76 percent, at 65, she has $2,852,199 of life insurance coverage and $ 2,376,833 in her cash account. Over 20 years, she has taken out $246,395 for a total of $4,927,900 tax-free income. Going out to age 100, she would take out $221,517 a year for a total of $7,753,095 in tax-free income 

Case example #3: A healthy 50-year-old man pays $250,000 annually to age 65 for a total contribution of $4 million. The initial death benefit is $5,231,350.

If the cash account grows at 5.76 percent annually, at age 65, he has $11,903,211 of life insurance coverage and $ 6,879,531 in his cash account.  From age 66, for 20 years, he can take out tax-free $705,599. Over the next 20 years, this will total $14,111,980. If he chose to go to age 100, he would then take out $620,958 a year for a total of $21,733,530 tax-free income.

Considerations

Some very potent tax advantages exist for using life insurance to help fund your future retirement. However, they come at a cost. There are insurance costs, commissions, and a few other costs. It becomes a trade-off between the tax benefits, including the tax-deferred growth of the cash account, and other options. Some of the factors that go into this decision are…

·      Maxing out other retirement options.

·      The amount of money you will need in retirement.

·      The amount of time until retirement.

·      The need or desire for a death benefit.

Another major consideration for some people is the need or desire to be able to get to the money pre-retirement. With a permanent life insurance policy, you can access the monies in the cash account whenever needed. This contrasts with a qualified plan, which says you cannot get to the funds until you reach a certain age.

For example, a percentage of business owners use the funds in their cash accounts to help them address company cash flow issues. They take short-term loans from their life insurance policy instead of tapping a credit line. Doing so can be much more cost-effective.

In sum, life insurance is a very versatile financial product. Permanent life insurance policies have significant tax advantages, including the tax-deferred internal growth of the cash account. If you have concluded you may need more money when you retire, you should probably evaluate if a permanent life insurance policy can be advantageous.

[1] These are case studies and are for illustrative purposes only. Actual performance and results will vary. These case studies do not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed, and a financial advisor should be consulted. These case studies do not represent actual clients but a hypothetical composite of various client experiences and issues. Any resemblance to actual people or situations is purely coincidental.