Are you wondering what the best type of account is to use to fund your retirement?
There are so many accounts and so many rules, it could all get a bit confusing. But if you’re wondering how to use a cash value life insurance policy to help supplement your retirement income and why it’s a good move, make sure you stick around to the end of this blog.
Conventional wisdom tells us that we should be saving in tax-qualified retirement plans: 401ks, 403Bs, and IRAs. But keep in mind that these accounts didn’t come into fashion until the 1970s. Prior to that, everybody saved in passbook savings and cash value life insurance. Before the 1970s, only the “rich people” had financial advisers, had stockbrokers. But with the introduction of these new qualified plans, it made investments accessible to everyone. I mean, almost everyone either has a retirement plan or could very easily open one up. The way they enticed us to invest in these accounts is with the tax deferment – the tax benefits.
What happens is we avoid the taxes today, but we are actually postponing them into the unknown future. Thinking about where our economy is, where our government is today, and where they could be going in the very near future, perhaps before we hit retirement or when we hit retirement age – is postponing taxes really a good idea for us?
It may be a good idea for the government because they get to determine what the tax rate is when we go to pull that money out. They say, “How much money do we need in tax revenue?” And then they say, “Oh, let’s just adjust the tax brackets to accommodate our needs so we could fulfill all these promises that we’ve made”.
The key is, that once the government gets us in these accounts, they can do whatever they want. Basically, there are two strategies you can employ for saving for retirement.
Strategy A is to take a tax deduction on a small amount of money today, put it in a place where you can’t touch it until age 59 and a half, and then the government could tax you on every dollar that comes out of there at whatever rate the government sees fit to pay its bills.
Strategy B is to pay tax on a small amount of money today and let it grow on a tax-deferred basis, but you’ll have complete liquidity use and control of that money to use it for whatever you want, whenever you want, no questions asked. But then when you get to retirement, the government could never tax that money ever again unless you choose for them to tax it.
Which strategy would be better for you? Strategy A or Strategy B?
In case you’re new to this blog, Strategy B is a specially designed whole life insurance policy designed for cash value accumulation, and the key is to start this policy as soon as possible. Why? It’s simple: compound interest. Compound interest takes time and it takes money. Once time is gone, we can never get it back. But these policies allow us to save consistently – month after month, year after year. We’re stashing money away in these policies so we could build that compound interest curve. On top of that, there are added benefits like the disability waiver of premium, where if you were to become disabled and unable to work, the insurance company is going to pay your premium for you. We also have the death benefit, guaranteed cash value growth, and guaranteed liquidity use and control via the policy loan provision.
So how do you access your money in retirement from a life insurance policy? Well, it’s very simple. Tax-free distributions are available up to your cost basis. What does that mean? Basically, it means that the amount of money you put in will come back to you tax-free. If you put in 100,000, the first 100,000 that comes out of the policy is tax-free. Over and above that, you can access the money through a loan feature.
Now, if your distributions from a life insurance policy are tax-free, what does that mean? It means that there’s no federal income tax, there’s no state income tax, there’s no Social Security offset tax, there’s no increase in Medicare premium, and in most states, life insurance death benefits pass outside of state inheritance taxes. So that’s five taxes you’ll be able to avoid in retirement.
Another way that life insurance can be used to supplement your retirement is to act as a volatility buffer in conjunction with your investment portfolio. So how does that work? Basically in a down year, instead of taking money out of your retirement account, you take the money out of your life insurance account. What that allows you to do is it allows your portfolio an opportunity to regenerate itself after a down year. One of the worst things you could do for your investment portfolio is taking a distribution in a down year. By instead taking money from the life insurance policy, it allows your portfolio a chance to regenerate and recover instead of taking that double hit in a down year.
As an added bonus if you’re saving for retirement using life insurance, you’ll have access to that money everywhere along the way. So you can use it to pay for a wedding, to pay for your children’s college, to buy a car, to invest in a business or the stock market. Again, complete liquidity, use, and control of your money. Complete liquidity, use, and control of your money on top of uninterrupted compounding of interest. That means the performance of your policy won’t be affected even if you have a policy loan. As long as you’re with a company that uses non-direct recognition, meaning the dividends credited to your policy won’t be impacted even if you have a policy loan.
In conclusion, a specially designed whole life insurance policy for cash accumulation is a great way to save for retirement, but it’s also a great way to protect your family and your business along the way because you have full liquidity use and control of your money and the ability to access that money without interrupting compound interest.
If you’re ready to get started with a whole life insurance policy for you and your family, schedule your free strategy session today.