{"id":3896,"date":"2020-05-01T15:14:00","date_gmt":"2020-05-01T15:14:00","guid":{"rendered":"https:\/\/fusionwm.com\/?p=3896"},"modified":"2022-10-12T15:20:45","modified_gmt":"2022-10-12T15:20:45","slug":"using-life-insurance-to-help-fund-retirement-needs","status":"publish","type":"post","link":"https:\/\/fusionwm.com\/using-life-insurance-to-help-fund-retirement-needs\/","title":{"rendered":"Using Life Insurance To Help Fund Retirement Needs"},"content":{"rendered":"\n
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You\u2019re probably aware that life insurance can offer some powerful advantages. When properly structured, it can deliver liquidity, leverage and flexibility.<\/p>\n\n\n\n

The focus of life insurance\u2019s features is often the death benefit and estate planning concerns. But what\u2019s sometimes overlooked is that some life insurance can also be used to fund retirement spending.<\/p>\n\n\n\n

Here\u2019s a look at how your life insurance could potentially make your golden years a bit brighter.<\/p>\n\n\n\n

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Taking the bite out of taxes<\/h1>\n\n\n\n

A permanent life insurance policy allows you to accumulate money in what is referred to as the policy\u2019s cash account. In other words, you can purchase a permanent life insurance policy with the intention to build up the cash account significantly in order to pay for future retirement expenses.<\/p>\n\n\n\n

What\u2019s more, the money in the cash account grows tax-deferred\u2014that is, you won\u2019t pay taxes until you withdraw money from the account.<\/p>\n\n\n\n

That said, you might be able to do even better and avoid paying taxes at all\u2014even on the gains in the cash account\u2014if you set up the policy in a certain way.<\/p>\n\n\n\n

Here\u2019s how it can work. A portion of the annual premiums you pay for your permanent life insurance policy goes into the cash account. You can obtain these funds without paying taxes\u2014it\u2019s called return of premium. Say, for instance, that a total of $200,000 from your premium payments went into the cash account. You can withdraw the full $200,000, tax-free.<\/p>\n\n\n\n

Additionally, you can take out loans on additional earnings in the cash account that have resulted from growth, if there was any growth in the cash account. Such loans are not considered to be withdrawals\u2014which means you don\u2019t have to pay taxes on them. (You can choose to pay back the loans during your lifetime or when you die\u2014at which point, the amount of the loans is subtracted from the death benefit your heirs would receive.)<\/p>\n\n\n\n

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Case studies<\/h1>\n\n\n\n

The following case examples provide some perspective on the results of leveraging the cash account in a permanent life insurance policy.<\/p>\n\n\n\n

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Case example #1<\/h1>\n\n\n\n

Consider a 45-year-old man in good health who receives a preferred rating from the insurance company, making the cost of a permanent life insurance policy as low as possible. He makes $50,000 annual premium payments for 20 years, until age 65. All told, he pays $1,050,000 for the life insurance (and has an initial death benefit of $1,253,349).<\/p>\n\n\n\n

Meanwhile, the cash account grows at an annualized rate of 5.76 percent. At age 65, he has $3,497,980 of life insurance coverage and $2,285,757 in his cash account.<\/p>\n\n\n\n

Starting at age 66, the policy provides him with annual tax-free income of $224,562 for the next 20 years\u2014totaling $4,491,240. If he wanted to make sure he had money until age 100, he would take out $199,443 a year. Doing so would give him $6,980,505 total in tax-free income.<\/p>\n\n\n\n

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Case example #2<\/h1>\n\n\n\n

A 48-year-old woman in good health pays a $100,000 annual premium for 10 years ($1 million in total). This gives her an initial death benefit of $2,647,354.<\/p>\n\n\n\n

The cash value account earns 5.76 percent annually, giving her $2,852,199 of life insurance coverage and $2,376,833 in her cash account at age 65. Using loans, she takes out $246,395 per year over the next two decades for a total of $4,927,900 in tax-free income. To extend withdrawals to age 100, she would take out $221,517 a year for a total $7,753,095 in tax-free income.<\/p>\n\n\n\n

Exhibit 1 summarizes the case examples.<\/p>\n\n\n

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Important considerations<\/h1>\n\n\n\n

As the case studies suggest, there can be potent tax advantages when you use life insurance to help fund your future retirement. But keep in mind, those benefits come with costs\u2014including the cost of insurance and commissions. As with most things in life, there are trade-offs.<\/p>\n\n\n\n

Some of the factors that might be considered when deciding whether to use life insurance in this way include:<\/p>\n\n\n\n