Thinking beyond basic retirement planning can give you greater financial flexibility in your golden years.
Your retirement strategy should begin with a tax-advantaged retirement account, but it doesn't have to end there. Supplementing your 401(k) or IRA with cash value life insurance can help give you greater financial flexibility during your lifetime while providing protection to your loved ones.
Unlike term life insurance, which only pays out a death benefit, cash value life insurance allows you to allocate your premiums inside the policy and gives you access to its available cash value while you’re alive. Cash value life insurance can also offer tax advantages that can benefit both you and your family.
Here are four ways cash value life insurance can enhance your retirement strategy:
1. Protection for loved ones
A cash value life insurance policy pays a tax-free death benefit (1) to your beneficiaries at your death. Your family can use the policy death benefit in any way they wish. For instance, it may help with expenses such as day-to-day living costs or paying down a mortgage.
2. Tax-deferred growth potential
Cash value policies offer tax-deferred growth potential—giving you another vehicle you can use to invest toward the future. When you purchase a cash value life insurance policy, part of your premium is allocated into an investment option that can accumulate tax-deferred interest over time. This option may be especially appealing if you contribute the maximum annual amount to your retirement accounts and are looking for further tax-deferred growth opportunities.
3. Tax-free supplemental income potential (2)
Cash value life insurance offers the ability to access the available cash value through potentially tax-free2 loans or withdrawals. Such loans or withdrawals may help you and your family cover unexpected expenses before or during your retirement.
4. Risk management
A cash value life insurance policy may help diversify your financial portfolio, potentially reducing your portfolio’s overall volatility and risk of loss depending on the type of cash value life insurance you choose. What's more, some policies allow you to allocate money to indexed accounts that credit interest based in part on the performance of major stock market indexes. (3) The interest rate credited for these accounts is protected from falling below a set level, which means your policy’s cash value is protected from market-based losses. Your cash value will be reduced only by policy charges and any loans, withdrawals, or other distributions you take from the policy.
If you're looking for a tool that protects your family in the event of the unexpected while also serving as a source of potentially tax-free2 supplemental retirement income, consider looking into a cash value life insurance policy. Work with a professional life insurance producer to help you find the product that best fits your situation and goals.
1 For federal income tax purposes, life insurance death benefits generally pay income tax-free to beneficiaries pursuant to IRC Sec. 101(a)(1). In certain situations, however, life insurance death benefits may be partially or wholly taxable. Situations include, but are not limited to: the transfer of a life insurance policy for valuable consideration unless the transfer qualifies for an exception under IRC Sec. 101(a)(2) (i.e. the transfer-for-value rule); arrangements that lack an insurable interest based on state law; and an employer-owned policy unless the policy qualifies for an exception under IRC Sec. 101(j).
2 For federal income tax purposes, tax-free income assumes, among other things: (1) withdrawals do not exceed tax basis (generally, premiums paid less prior withdrawals); (2) policy remains in force until death (any outstanding policy debt at time of lapse or surrender that exceeds the tax basis will be subject to tax); (3) withdrawals taken during the first 15 policy years do not cause, occur at the time of, or during the two years prior to, any reduction in benefits; and (4) the policy does not become a modified endowment contract. See IRC §§ 72, 7702(f)(7)(B), 7702A.Any policy withdrawals, loans and loan interest will reduce policy values and may reduce benefits.
3 Indexed universal life insurance products do not directly participate in any stock or equity investment.