The first lesson I got in saving for retirement talked about baskets and eggs. The long-standing idea is to spread your risk over various tax-advantaged vehicles (“Don’t put all your eggs in a single basket”). The way our assets are taxed, groups them in three possible categories: taxable, tax deferred, and tax-free.
When we split risk, we want to also take advantage of the taxation breaks made available by Uncle Sam. One often overlooked “basket” is the tax-free utilization of cash value inside a life insurance policy. Sometimes presented by some financial advisors as “free banking” or a self-banking tool, the value accumulated inside your life insurance policy can, if set properly, supplement retirement funds and provide secured loans for anything you may need.
The IRS publication 525 sets apart life insurance policies as non-taxable (if set up correctly) so the loans against cash value and death benefits received are not a taxable event. The short explanation is that usually, life insurance is paid for with after-tax dollars. The long explanation needs a more in-depth discussion.
What other benefits do life insurance contracts have?
Besides the obvious death benefit provided by life insurance, which is designed to cover your final expenses and protect your survivors, there are other LIVING benefits of life insurance that YOU can personally benefit from, while still alive:
– Cash out early – you can get a loan against the cash value inside your life insurance policy. Pay-off your mortgage, start a business, buy a new car? Use it wisely, don’t waste it, it’s your money after all.
– Use the funds to supplement your retirement income: set it right and your life insurance policy can provide additional funds to spend during retirement.
– Guarantee your income in case of a catastrophic health issue that may cut your career short: by adding a disability income rider, you guarantee that you can still bring in a income if a medical issue during your working years causes your paychecks to stop.
How much cash value can a policy accumulate over time?
It’s not unheard to have over $1,000,000 by retirement age, if you started your policy when young.
EXAMPLE: start @ age 25, get $300/mo. policy, see how much will it accumulate by age 65? {PUBLISH RESULT HERE WHEN READY}
Goal: Zero risk, zero tax
What’s the actual risk of utilizing life insurance for its cash value?
Compared to investments, a life insurance contract has built-in guarantees, guardrails that will help you earn when the economy is moving up, while at the same time offering guaranteed protection of zero loss if the market goes down.
Combined with the added protection against income loss due to health reasons, your life insurance policy becomes a powerful tool in your financial planning portfolio.
When should I start?
Just like planting a tree, the best time was 20 years ago. The next best time is NOW. The more time you allow your policy’s cash value to grow, the better job compound interest does in your favor. Don’t miss out on the peace of mind: your money is protected and grows tax-free.
Set your life insurance right!
Get set for life.
Article first published on LifeGuy.com by Daniel “LifeGuy” Dragan, Financial & Retirement Advisor. Daniel owns LifeGuy.com and as a 20-year veteran financial advisor has helped thousands of clients with their finances, retirement and insurance needs.
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