Life Insurance Retirement Strategies

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Although life insurance is most often purchased for the purpose of providing death benefits for a policyholder’s beneficiaries, it can also be used to supplement retirement income. Permanent life insurance policies such as universal, variable and whole life accumulate a cash value, thus making them an effective retirement planning option for some taxpayers. While such polices are generally limited by a relatively high cost and a low annualized growth rate, they provide a number of tax advantages as well a means of protecting against the inevitable volatility of the equities market.

The following are some of the situations where it may be financially advantageous to use permanent life insurance policies to help fund retirement:

  • Since distributions though borrowing from whole life policies are tax free, they can be a good source of supplemental retirement income. This is especially true in a down equities market where an individual may want to avoid obtaining funds from equity based investments that are at a temporarily depressed value.
  • Supplementing retirement income from permanent life insurance policies has a definite tax advantage. Cash withdrawals from such policies are not classified as taxable income so that an individual who supplements income in this manner may end up in a lower tax bracket than if the funds were obtained from a taxable source. This being the case, any additional income taxable income for that given tax year would then be taxed at a lower rate than would otherwise be the case.
  • Funding permanent life insurance policies may be a good retirement planning strategy in cases where contributions to other tax deferred options such as IRA and 401(k) accounts are already being maxed out due to contribution limits set by the tax code.

Although the low growth rate and high cost of permanent life insurance policies are definite drawbacks to including them in a retirement planning strategy, they do provide certain tax advantages as well flexibility in the inevitable event of a market downturn. Since most estimates indicate that individuals need about three fourths of their pre-retirement income in order to live comfortably post-retirement, a conservative retirement plan must include options that allow for weathering the volatility of the equities market. Permanent life insurance policies fulfill this requirement, thus making them a worthwhile source of retirement income for some.

If you are interested in learning more about life insurance options as they relate to retirement planning, the experienced transaction specialists at CGT Solutions can provide you with the help you are looking for. Contact us today to receive a free, no obligation consultation.

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