Individuals who are looking to use permanent life insurance as part of their retirement plan must understand a fairly complicated product and an unconventional strategy.
Here are 4 Ds you need to know when using your life insurance as a retirement plan.
This article is written as general education, and should not be considered as personal financial advice. If you would like personal guidance with life insurance, you can schedule a time to talk with one of our experts.
Proper distribution usually consists of withdrawals to cost basis and then loans.
This distribution method is used because withdrawals in a properly funded policy are taxed on a FIFO (first in first out) basis, and is considered a return of premium.
Therefore, withdrawals are not taxable as ordinary federal income until you exceed the cost basis, or the sum of the premiums paid into the policy.
When withdrawals exceed cost basis you would be taxed as ordinary federal income.
Loans on policies can after withdrawals be used for distributions, and may be received without taxes if the policy is properly funded.
If the insured passes away, the death benefit would pay off the loan, provided there is a properly named ownership and beneficiary arrangement.
2. Death benefit
Distributing money from a life insurance policy will have different effects to the death benefit and any riders on different types of life insurance policies.
In general, money distributed as retirement income will decrease your death benefit, however, the amount that your death benefit decreases will differ depending on the type of policy.
3. Deferred taxes
Life insurance Policies typically grow tax-deferred unlike savings, stocks, or mutual funds where you may have realized gains/losses that are taxed annually.
As discussed above, loans on properly funded policies are also accessed on a tax-deferred basis unless the policy lapses or is surrendered.
If you are going to incorporate life insurance in your retirement plan you will need to be diligent and:
- Pay premiums on time and as agreed
- Monitor the performance of your life insurance investments at least on an annual basis and adjusting them to fit your current risk tolerance
- Ask questions to your financial and tax advisors
If you are planning on using a life insurance policy as a retirement plan make sure you are diligent and fully understand your responsibilities, especially monitoring the policy for plan success.
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To get started you can request a personal plan online or schedule a call with one of our industry experts.