You probably know that life insurance provides a death benefit that can provide for your loved ones if you pass away. But did you know that life insurance can also help fund your retirement?
If you're already contributing as much as you can to an employer-sponsored retirement plan but want to do more, this is how. Let's look at a specific example.
Get Tax-Free Income for Retirement
Meet John Doe. John is a 45-year-old man who lives in Ohio. He doesn't smoke, and he's in good shape. He earns a "preferred" rating on his life insurance application. As part of his retirement plan, John bought a universal life insurance policy to protect his family after he's gone. He is both the insured individual and the policy owner.
To pay for the policy, John will make $10,000 in premium payments each year for 20 years using after-tax income. (After-tax is key for ensuring the death benefit is also non-taxable for your beneficiaries.)
As he makes those payments, a percentage of every payment goes into the cash value portion of his account. John's universal life policy specifies an interest rate that his cash value will earn. If John's rate is 5.4% for the length of his policy, then at the beginning of Year 21, John can start taking an annual distribution of over $23,000 from his policy's cash value for the next 15 years.
John can take cash withdrawals up to the total amount of premium he's paid over the life of the policy. In his case, he's paid $200,000 of premium so he can take $200,000 worth of distributions. After he passes that amount, he can still take policy loans to keep supplementing his retirement income. Overall, John will receive a total distribution of over $345,000 (including the distributions in excess of his $200,000 cost basis)...all without any income tax.
But that's not the only benefit. John's death benefit will reach about $1,000,000 when John is in his late 80s if he doesn't take any money from the cash value. Because of the extreme flexibility available with permanent life insurance, John can choose to manage his money in several different ways. He can take a lesser amount each year from his cash value, or take money only in lean years. By using his premium dollars as double-duty for death benefit and income, John's financial future offers a range of options for him and his family.
Review Your Policy Yearly
If you buy a policy like John's, I'll be in touch yearly to review it with you. If your needs change, you can increase or decrease the annual premium to make sure there's as much as you need in the cash value of your account. You might also decide that you don't need supplemental retirement income and want to use that money for the death benefit instead.
Let me help you get started earning tax-free retirement income! Call me or send me an email today.
Note: Policy loans and partial withdrawals may vary by state, reduce available surrender value and death benefit or cause the policy to lapse. In most cases, policy loans or partial withdrawals won't be taxable as long as you limit your withdrawal to the amount of premiums you've already paid. Consult all policy documentation or your agent for details.