By Robert Fattore, PRCUA Director of Sales
As a licensed life insurance agent, I can tell you that the single biggest attraction to life insurance is the general income tax exemption. Life Insurance benefits, paid to the beneficiary, are always tax-free.
Life insurance should be a foundation of any serious financial, retirement, or estate plan, but it is not used nearly enough, According to LIMRA’s 2016 Trends in Life Insurance Ownership study, more than 37 million American families are completely uninsured and at financial risk if their primary wage earner dies unexpectedly. In this blog, I’m focusing on permanent or what is also called Whole Life Insurance. We will discuss term insurance at a later date.
The Advantages of whole life insurance are:
- Guarantees lifelong protection as long as premiums are paid
- Generally, premium costs are fixed
- Develops cash values, which can be borrowed against; loans must be paid back, otherwise death benefit will be reduced by the amount of the loan balance at time of death
- Cash values can be surrendered, in total, or in part, for cash or to convert to an annuity
- Cash values can be used to pay future premiums or provide paid-up insurance
- Generally dividend participating – can be used to reduce the amount of future premiums needed or purchase additional paid-up insurance
- High initial premium levels may make it hard to buy enough protection
- Is more costly than term
But besides the tax free death benefit, here are five points for considering whole life insurance to enhance long-term financial security.
- Life insurance is a good asset.
Most people have their retirement savings in IRAs and 401(k)s. These plans are completely opposite of life insurance because they are tax-deferred. The tax will one day have to be paid, creating a growing debt on these retirement savings.
This makes traditional retirement accounts an inexact and lessening asset over time. Replacing these accounts gradually with whole life insurance can turn these tax-deferred funds into tax-free savings. People should consider a program of systematic IRA withdrawals to decrease their IRA balance and direct those funds into permanent/whole life insurance.
The tax on most IRAs will have to be paid beginning at age 70 ½ so it may be attractive to deal with this now.
- Life insurance is an investment, not an expense.
People will say life insurance costs too much. But most don’t know over time it can be an attractive asset. Moving funds either from IRAs to permanent life insurance is not an expense; it’s an investment into a better long-term asset. Yes, if the funds are withdrawn from an IRA, there will be a tax to pay, but that tax will have had to be paid at some point anyway.
Once the funds are in a permanent/whole life insurance policy, they are simply located in a different and far better long-term asset than an IRA or 401(k). The funds in the life insurance policy remove the tax risk in most instances.
- Life insurance has lifetime benefits.
Most think of life insurance for the death benefit, but many don’t know about the powerful lifetime retirement and tax benefits. Funds in a permanent life insurance policy can double as a retirement savings account, but without the worry about what future tax rates will be.
If these funds are needed in retirement for nursing home issues, medical bills or other unexpected event, they are accessible, generally tax- and penalty-free. That is a big deal, because funds in an IRA, that are distributed would be taxable (in a traditional IRA).
Accessing funds from a life insurance policy are tax-free (up to cost-basis i.e., what you paid into the life product; and thereafter if taken as policy loans against the tax-free death benefit) so they don’t increase income. The withdrawals keep taxable income and taxes lower in retirement. These are valuable lifetime benefits, in addition to the death benefit.
- You get more control with life insurance.
IRAs are subject to annual required minimum distributions (RMDs) after age 70 ½, whether the money is needed or not (Roth IRAs are exempt from lifetime RMDs). This causes forced distributions and additional taxes, though the client may not need or want to withdraw those funds.
These forced withdrawals remove the control aspect, while withdrawing from the value in a life insurance policy can be done at any time, or not. Clients control retirement savings in a life insurance policy.
- Leverage is a powerful tool for wealth creation.
Life insurance creates more long-term wealth than any other investment. And because this wealth is income tax-free, it is much more valuable than tax-deferred retirement savings that are at the mercy of future higher tax rates.
It’s the leverage that creates the wealth. Life insurance is the only investment where one dollar can do the work of many dollars and the result is guaranteed and generally tax-free. For example a 40 year old male that has $10,000 can get a life insurance face amount of over $36,000, almost $3.60 of life insurance for every one dollar paid.
Taking the same funds that were in an IRA and investing them (after-the tax was paid on the IRA distribution) in a permanent/whole life insurance policy, would produce many multiples of that original IRA balance, and it would be generally tax-free, not only for use during life but especially if there were an early death.
These are only five considerations, but they need to be known to non-life insurance people, like many, and better understand the power and security of an investment in whole life insurance, for life and beyond.