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How to use permanent life insurance in retirement planning.
Once you become an empty-nester and had your mortgage-burning party, you might decide that you don’t have to keep your life insurance anymore.
Maybe, or maybe not. If your life insurance was purchased solely for the death benefit, you probably have a valid argument, but what about your retirement?
It’s no secret that retirement planning can be totally disrupted if Uncle Sam decides to increase taxes. To believe that personal income taxes will stay where they are now is simply naïve.
America has massive debt that is the result of many years of tax and spend legislators. Just the interest on the debt is massive and when you combine it with other massive entitlement programs, the economy has been and will continue to be in the hands of many unelected officials and as a result, you and I will continue to foot the bill.
Death and taxes, you better believe it! But hold on, there is a way to beat the taxman, use permanent life insurance in retirement.
Permanent Life Insurance can be your Safe Harbor in a Stormy Economy
Most of us consider market-based investments as an integral part of retirement planning because they help accumulate wealth and protect you from inflation.
When prices go up, you’ll generally see an increase in the value of your investments. However, when the market declines, you’ll likely sell some investments which will have a negative impact on your retirement plan’s earning power.
When your retirement plan includes permanent life insurance purchased from a mutual insurance company, your policy’s cash value just keeps moving along as steady as you please because the interest earnings are guaranteed and tax-deferred.
And, don’t forget about those dividends! (more about that later) Since your whole life insurance is not tied to the market, it can be an awesome solution when you’re forced to sell off underperforming market-based investments.
Permanent Life Insurance is Tax Efficient
Since our tax system is designed to take more rather than less of our money while we are working and during retirement, the more we make, the more taxes we pay.
For example, when you can finally withdraw your money from your 401(k) or your IRA when you need it the most, you’ll have a tax liability attached to your withdrawal.
And, if you withdraw larger amounts because of unexpected expenses, the withdrawal could actually throw you into a higher tax bracket. If that happens, you’ll have to withdraw even more funds to keep up with your higher tax bracket.
How to Beat the Tax Man during Retirement
Since you know that there will be a tax liability attached to your income stream during retirement combined with the knowledge that this liability can easily increase, you need to have a mixture of taxable and tax-exempt sources that you can draw from in retirement.
With a permanent life insurance policy (whole life) you can withdraw your basis (premiums paid in) as you need to without having to worry about tax liability.
Or, you can simply take policy loans and elect to repay or not repay. Your cash account will be collateralized to the extent of the loan but your loan is from the insurer, not your cash account, which means your cash account will continue to earn interest and those coveted dividends.
Now, if you have to increase your annual income stream, you can use your cash value rather than risk being moved to a higher tax bracket.
Even if the day comes when you want guaranteed income and don’t feel you need your permanent life insurance anymore, you can easily do a 1035 exchange from your life insurance cash account to an annuity with a guaranteed income stream for the rest of your life.
What if I get sick and need Long-Term Care?
Probably, the only thing worse than outliving your retirement planning is if you become ill and need to spend significant time in a long-term care facility.
If this happens, you can use the Long-Term Care rider in your whole life insurance policy to access a portion of the death benefit to cover the significant costs associated with long-term care.
The Long-Term Care rider provides for the insurance company to advance you a large portion of your death benefit so you can deal with the monthly costs of a long-term care facility and long-term care nursing.
The advance on your death benefit is not taxable but will be deducted from the death benefit, but will allow you to pay long-term care expenses without liquidating other assets.
What about Dividends?
If you decide to use permanent life insurance as part of your retirement planning, it’s important that you purchase a participating whole life policy from a highly-rated mutual life insurance company. Here’s why:
- Dividends are a return of premium and as such, they are not taxable.
- Dividend payments over time will reduce your cost of insurance
- Dividends can be used to purchase paid-up additional life insurance which will earn interest and earn dividends.
- Depending on the policy purchased, outstanding loans with your insurer may not affect the amount of the dividends you receive each year.
- Applicants can easily research the historic dividend payouts for any mutual insurer they may be considering.
Your dividends can be used in many different ways. As mentioned above you can use dividends to purchase paid-up additional life insurance (recommended).
They can also be used to:
- Reduce your annual premium payments
- Be applied to an outstanding loan
- Accumulate at interest
- Reduce the number of premium payments required
- Taken as cold, hard cash
You’ll never be advised by Dave Ramsey or Suze Orman to use whole life insurance in retirement planning or as a life insurance product in general. Maybe because these financial gurus stick to the old “buy term and invest the rest” mantra or maybe it’s because their consumer base is middle America (we pay taxes and worry about retirement also).
But you will be encouraged by the likes of David McKnight (The Power of Zero and The Volatility Shield) and Brian Bloom (Confessions of a CPA: The Capital Equivalent Value of Life Insurance). Oh, and by the way, over 50% of CEOs with Fortune 500 Companies, use permanent life insurance in their retirement planning.
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