A popular solution in GST tax exemption planning is life insurance. Answered on May 28, 2013 Life insurance plans provide income for your dependents if you die sooner than expected. Using Life Insurance As An Investment, Good Idea? All Rights Reserved, This is a BETA experience. Safety is key when planning for retirement. This may all sound like a witches’ brew and more trouble than it’s worth. While these taxes can quickly deplete a wealthy estate, current law allows an exemption of $11.4 million before they apply. John was a successful business owner, and Jane was a doctor. Next, working with the in-force cash values in the policy, the retiree determines an ongoing level income to take from the policy. At a meeting of financial advisors, I was recently asked, “do you actually think life insurance is an investment?” My inquisitor was making more of a statement than asking a question, so she was surprised by my answer: “I can tell you that life insurance was an investment for me; one that I’m benefiting from now.”. Section 7702 of the U.S. Internal Revenue Code requires insurers to maintain a sufficient risk element in the policy to qualify the product as life insurance under the tax code. The best life insurance that is just simple life insurance is called term life insurance. John and Jane are high-net-worth individuals. When Gen 1 died, the trust received $25 million income tax-free, and neither Gen 1 nor Gen 2 pay gift, estate or GST taxes on the death benefit. There is no investing angle to it. 6 Key Themes To Watch, Late Surge In Wealth Management M&A Powers A Record Year For Industry Deals, Petition Launched To Extend Comment Period On Cryptocurrency/Bitcoin Self-Custody Regulations. Retirement — it’s that glorious time in your life where the only worry you should have is why your grandchildren haven’t called yet this week. If you are to pass away prematurely, the death benefit will pay out to your beneficiaries income tax-free, net of your loan that you have already taken as a retirement income stream. These charges increase with age and are … If you're still convinced gold is for you, you can invest in funds that own gold, though many gold fans — often called goldbugs — prefer buying the physical metal, even though it may mean additional costs for storage and insurance. … Now, let’s say John and Jane planned differently. In the highly competitive financial services sector you will hear advice for 100 different products And it’s not just because of the cash value associated with permanent insurance. You use after tax dollars to accumulate a fund that pays out tax-free. I am Co-Director of the Retirement Income Center at The American College of Financial Services, helping consumers, business owners and their advisors avoid a headache or two with retirement planning. My 40-year background working with retirement planning issues has given me insight into both the opportunities and risks associated with retiring. If you retire with debt or have children or a spouse that is dependent on you, keeping life insurance is a good idea. If the question is geared towards one, single product, then any answer for anything would be no. Conceptually, the transaction works like a Roth IRA. LIRPs provide a “floor” in which it is not possible to perform less than 0% (sometimes more depending on the type of policy). So, back to answering my inquisitor at the meeting. In essence, I utilized the policy as a way to tax-efficiently supplement our monthly income. In other words, the loan would be for the desired income plus the interest required for the loan itself. If you have already maxed out your other tax-advantaged retirement savings plans, LIRPs can be a good alternative to obtain a tax-free income stream in retirement. But insurance is something of a necessary evil. Their taxable income is $100,000. Whole life insurance has it's proper place in financial planning. Always remember that there is no “one-size-fits all” retirement plan. A wealthy individual, Gen 1, uses her entire $11.4 million generation-skipping tax exemption to pay a one-time premium for life insurance. Let’s say instead of taking the $70,000 from their retirement accounts, they take a tax-free loan from their LIRP. Cash value life insurance takes on various forms such as whole life, universal life, variable life and variable universal life policies. So, Generation 1 can set up a trust that uses $11.4 million to skip a generation, landing the wealth in the hands of Generation 3, transfer tax-free. It’s intended to pay off debt, provide a survivor income or otherwise generate liquidity for a premature death. So, while the policy is in force, a death benefit is always in play. I write about retirement income planning – and risk. Now my wife and I receive a monthly guaranteed amount that will pay us until the last of us die. In this case, the family is the investor, not the individual. Here are six types of insurance you might not have considered for retirement. But I didn’t die, and yet I made an approximate 6% after-tax internal rate of return on my premiums. The original source of that income is the owner’s tax basis in the contract. For most people, purchasing whole life and other types of permanent life insurance isn’t a good way to invest. High-net-worth individuals would qualify for this strategy, as many times, the contribution limits for 401(k)s and IRAs are not enough to satisfy their retirement objectives. With any cash value life insurance policy, as the account grows, you can borrow against it or potentially withdraw money. If the insurance policy runs out of money, the owner incurs income tax without any corresponding cash to pay the tax. The market plunged. Let’s look at an example that further explains how LIRPs function as a retirement planning tool. This technique is not suited for everyone and does not replace your 401(k)s or IRAs. Life insurance has maximized the leverage of this transaction. Life insurance can be a valuable tool for retirement planning if your situation allows for it. The information provided here is not investment, tax or financial advice. Some individuals elect to take out a cash value life insurance policy particularly if they have already contributed the maximum allowed amount to their retirement plan. Whether or not life insurance is a good investment for you depends on your individual finances as well as the length you'll need coverage. Accumulation and risk protection during the working years switches to decumulation and retirement income. This is not the case. Let’s take an extreme example to demonstrate the leverage. The investment portion of permanent life insurance … They implemented a LIRP years ago for retirement. Life insurance as an investment in estate planning. There are other ways to structure cash value life insurance to help supplement retirement income planning. A professional financial advisor can help you learn more about whether this strategy would benefit you. Traditionally, whole or permanent life insurance was considered to be part of a sound investment portfolio. One noted company automates the entire income process so that the checks come monthly; the company knows when to switch from withdrawals of basis to loans, and then, when the values start to run out, the policy is essentially collapsed into a contract that won’t lapse. LIRPs are essentially over-funded policies, that is, amounts above the premiums required to keep the policy in force. The bottom line is: no. The greater your provisional income, the more of your social security will be taxed (up to 85%). The heavy fees involved with cash-value life insurance can really drag down your returns. The choices we have available to us for investments have changed greatly, and there are just too many better ways to accomplish that goal. Agents make a lot of money selling the idea that life insurance is a great way to save for retirement. Generation 2 doesn’t suffer for wealth because they live off the income in the trust. As far as the owner is concerned, he gets a level tax-free monthly income for several years in retirement. The primary disadvantage to insurance as an investment is you must pay the internal insurance charges for the life insurance benefit. An added consideration is that the federal exemption is slated to return to a lower amount starting in 2026. Even accounting for inflation, the family experiences little, if any, diminution in the value of their wealth through three generations. Should you use it for retirement planning however? You should consult with a licensed professional for advice concerning your specific situation. If you have a whole permanent life insurance policy, some of the premiums go into an account that builds cash value. My 40-year background working with retirement planning issues has given me insight into both the opportunities and risks associated with retiring. Many people do not view life insurance as an essential and vital part of a retirement income plan. Can you see how this can be used as a helpful retirement planning tool for some? A term life insurance policy covers a specific period, generally, 10, 20, or more years, whereas the whole life insurance policy is for the entire life of the policyholder. That could mean recommending life insurance for your retirement … Contrary to what some in the insurance industry would have you believe, I do not believe insurance products, in general, should be considered part of your retirement investment portfolio. It’s inexpensive and there is no investment component to it. There are two fundamentally different philosophies for retirement income planning, which I call probability-based and safety-first. Even in my case, I still own other life insurance policies intended to provide a death benefit. Given these costs, term life insurance can be an ideal retirement savings tool in two ways. When purchased early and before you're facing health and other challenges, life insurance is often a good choice. However, some financial advisors also recommend life insurance as one way to plan for retirement. • Safety: Let me bring you back to 2008, which I know many people remember all too well. Whole life insurance policies cost an average of five to 15 times more than comparable term life policies, which means that they’re expensive to maintain over the long term. But it is hard to disagree with the tax advantages possible with life insurance as an investment. It is also a safety feature for your heirs. Considering I plan to be alive during my […] The policy first deferred taxes during my high-income earning years, and now spreads both the income and the income tax out over my lower earning years. And this is called whole life insurance. • Long-Term Care and Death Benefit Options: One of the biggest advantages other than the retirement income stream is long-term care benefits. Whole life insurance is a type of permanent life insurance. That said, a popular life insurance retirement planning strategy involves directing as much premium as possible into cash value with the least amount allocated to the death benefit. Though it is a life-changing occasion and naturally stressful, it should be an easy transition from work life to retirement life, as you have been planning for this moment for what should be the past 40 years. Yes, in the right situation and used correctly, life insurance can be considered an investment. If you are investing in universal life, you are paying a high premium for a lengthy period of time, possibly two to five times longer than you would with term life. Life insurance is part of a good retirement plan. The question is what investment to use to maximize the efficiency of the $11.4 million exemption in moving money through the generations. Fast forward to last year when my family was grown, and I had transitioned from working in industry to working in academia. I explained to her that about 20 years ago, I started paying annual premiums into a whole life policy that was designed to have low loads and high cash values. Also, consider maxing out your 401(k)s and IRAs prior to funding a LIRP, as employers often will match your contribution to a certain limit, which is essentially “free money” for you. 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Accusations occur over high loads, poor administration and unrealistic illustrations. The $25 million principal in the trust will eventually go to the grandchildren, Gen 3, after Gen 2’s death. Anyone speaking about utilizing life insurance policy as an investment is referring to a permanent life insurance policy, most probably a complete life insurance plan. The regulatory winds are changing, and many investment pros have been changing their business models as a result. Today, I will share to you one of my favorite hacks that I learned from one of my friend in building wealth. If you’ve hit a rough financial patch, you may be able borrow against this cash value. Most policies provide accelerated death benefits that are available if you are terminally ill, which can help protect you and your family. I am so passionate about retirement planning, at 64 years old I obtained my Retirement Income Certified Professional (RICP®) designation, and I refuse to retire. Retirement planning is a combination of products, not a single one. So, leveraging the exemption is a matter of “use it or lose it.”, Life insurance as an investment in retirement planning. Assume the policy’s death benefit is $25 million and it resides in a dynasty trust. Just focus on buying life insurance only…without any “investment” angle. So, the family that utilizes life insurance as an investment currently has the added advantage of leveraging the high exemption while it is available. To be clear, the vast majority of life insurance is purchased for risk management. That’s how you take care of life insurance. Are HECM Reverse Mortgages Best Viewed As A Stand-Alone? As I mentioned last time, retirement income planning has emerged as a distinct field in the financial services profession.But because it is still relatively new, the best approach for building a retirement income plan remains elusive. Simply put, it builds up cash values tax deferred and can pay them out tax free. You may opt-out by. Insurance policy. Consider how the death benefit of a policy can generate millions in tax savings for a wealthy family. Is whole life insurance a good investment for retirement? It is cheap. Each March, right after receiving my annual bonus from work, I’d faithfully write a premium check to the insurance company. Retirement planning is for you, and life insurance is for your beneficiaries. The death benefit is an obvious and critical part of this plan. They are currently withdrawing $70,000 per year out of their retirement accounts (IRAs and 410(k)s). Cash value life insurance can also be paid out to beneficiaries upon the death of the insured. However, LIRPs were not. I made a tax-free exchange of my policy into an immediate payout annuity. Because life insurance is taxed on a “first-in, first-out” basis, this tax-free “loan” can be made up to basis, or whatever you have already put in. Tax-deferred accumulation, asset protection, and penalty and tax-free distributions to name a few. Keep in mind that I could have died during my pre-retirement years, and my wife would have received a substantial tax-free death benefit. But whole life insurance is often also sold as an investment. In most cases, retirement strategies are fully taxed or tax-deferred. This is critical when trying to get to that “0% tax bracket.”. Like any investment, the results of the transactions are highly dependent on the performance of the company that handles the contract. The challenge for these family dynasties are the three federal transfer taxes that charge a flat 40% rate on transfers: the gift, estate and generation skipping transfer taxes (GST). In other words, I didn’t need the death benefit anymore, and my taxes were lower. The IRS has indicated it will not “claw back” this high exemption once it has been used. Their taxable income is now $30,000. Once the tax basis has been exhausted, the owner switches to making capitalized loans from the policy. was recently asked, “do you actually think life insurance is an investment?” My inquisitor was making more of a statement than asking a question, so she was surprised by my answer: “I can tell you that life insurance was an investment for me; one that I’m benefiting from now.”, EY & Citi On The Importance Of Resilience And Innovation, Impact 50: Investors Seeking Profit — And Pushing For Change, Michigan Economic Development Corporation With Forbes Insights, 4 Unique Retirement Resolutions That May Actually Help, Multiemployer Pensions Update: A Lump Of Coal In Their Christmas Stockings, How To Decide Whether To Convert An IRA And How Much To Convert, Stimulus Checks For Those Earning More Than $75,000/$150,000 - How It Works, 6 States With Automatic I.R.A.S May Fall Short, Good News For Restaurants And Other Food Service Providers Taking Second Draw PPP Loans. 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