Supplement your retirement income with life insurance

Does your retirement plan include life insurance?

Permanent life insurance is gaining popularity as a retirement funding option due to pure economics. In today’s world of low interest rates and a fluctuating stock market, the tax advantage of life insurance makes it an attractive option for retirement savings. We call this strategy a SIRP – supplemental income for retirement plan.

Cash values within a permanent life insurance policy are protected from current taxation, so it grows tax-deferred. Additionally, when you withdraw or borrow money from the cash value account of a life insurance policy, you don’t have to sell the asset as you do with stocks, bonds or certificates of deposit (CDs). This means you can withdraw your basis (the amount you have paid in premium) or borrow money from the policy without having to pay taxes. It is tax-free income.¹

It typically takes 15 or more years to accrue enough cash value in a policy to generate a meaningful stream of retirement income. However, once you have built up cash value, getting the money out is easy. There is no approval process so it usually only takes a few days to access your money and there are no taxes on the money you take out if your policy is structured correctly.

Life insurance provides a Roth IRA alternative

Individual Retirement Accounts (IRAs) are a common option people use to generate retirement income. A traditional IRA allows a deduction on contributions, subject to income limits, and assets grow tax-deferred. However, all withdrawals are taxed at ordinary income rates and individuals must begin taking required minimum distributions at age 70 1/2.

Roth IRAs differ from traditional IRAs in that contributions are not deductible, but assets are tax-deferred and distributions are tax-free. A Roth IRA, however, has both contribution limits and income restrictions. Life insurance can be used as a good savings alternative for individuals who are not eligible for a Roth IRA because: 1) they have an income that is too large to satisfy the Roth requirements, 2) they have no income, or 3) they want to save more than allowed by contribution limits.

Life insurance has no contribution limits, cash values grow tax-deferred, distributions are tax-free and there are no minimum required distributions. This makes a permanent life insurance policy a good alternative to a Roth IRA.

 

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Why life insurance is a good option for retirement income

Many people take advantage of the common options for setting aside tax-advantaged funds such as 401(k)s and IRAs (i.e. qualified plans). However, savvy individuals are seeking additional tax-advantaged options. Utilizing permanent life insurance for supplemental retirement income is one of these options.

Here are 15 reasons why life insurance is a good option for retirement income:

1. Cash accumulation – It can be supplemental retirement income or your own personal bank for emergencies.
2. Tax-deferred growth – No tax is due on the appreciation of cash values.
3. Tax-free access to cash accumulation – You can make withdrawals up to basis and loans.
4. No mandatory distribution – There are no required minimum distributions (RMDs) at age 70 1/2 as with qualified plans.
5. No taxation of Social Security – Unlike RMDs, it does not create taxation of Social Security.
6. Protection against market loss – There are guaranteed crediting rates on some products.
7. Upside growth potential – Ask your life insurance agent about indexed universal life policies (IULs).
8. Downside protection potential – IULs and whole life policies won’t decrease due to market volatility.
9. Protection against creditors and lawsuits² – This level of protection is determined by state bankruptcy laws.
10. Living benefits from your death benefit – Talk to your life insurance agent to learn which policies offer benefits that allow you to take part or all of the death benefit early under certain circumstances.
11. Access to cash at any age – Should a cash need arise before retirement, you’ll be prepared.
12. No minimum age or income requirement – Anyone can purchase life insurance; however, it does have health and financial requirements.
13. Continued policy funding if disabled – Ask your life insurance agent if a Disability Payment of Premium rider is available to you.
14. Death benefit – Life insurance provides tax-free income for your heirs.
15. Avoids probate – Your death benefit is paid directly to your heirs.

In today’s world of low interest rates and a sometimes volatile stock market, life insurance provides unique options as a savings vehicle for retirement income. A well-funded SIRP – supplemental income for retirement plan – can provide you the income you need for a secure retirement.

This strategy has been around for decades and it’s just as real and powerful today as when it was first introduced. If you see the potential and can afford to take advantage of its great benefits, a SIRP may be the answer to your retirement income needs.

References:
1 - Withdrawals and policy loans will reduce the available cash value and death benefit and may cause the policy to lapse or affect guarantees against lapse. Additional premium payments may be required to keep the policy in force.
2 - May vary by state.

A special thank you to Grange Life Insurance Company and Kansas City Life Insurance Company for contributing this article to Grange Insurance’s Tips & Resources blog.

This article can't be used by any taxpayer for the purpose of avoiding U.S. federal, state or local tax penalties. It is written for general education purposes only. Life policies are offered by Kansas City Life Insurance Company and are subject to underwriting approval.

All life policies are underwritten by Kansas City Life, Kansas City, MO, and are subject to underwriting approval.