Life Insurance Blog

Life insurance cash value for retirement
January 27th, 2009
in Life Insurance

Life insurance cash value (whole life or universal life) can be a great supplement to your retirement income. To live a healthy financial life it makes sense to diversify and build value in different vehicles. Some of the great benefits of using life insurance to supplement your retirement is that if done correctly you can withdraw the money tax free. Qualified plans are great, but they are fully taxable at retirement as you have never paid tax on them. They also have restrictions about distributions and penalties for early withdrawals. I recommend putting the amount in your qualified plan that gets you the full match. After you hit the match amount, I suggest you may want to put the money above that in a separate vehicle. Compound interest is great, but compound tax is also an issue to consider.

The way to use life insurance to supplement your retirement is to take the money out as a withdrawal up until you hit your cost basis. Withdrawing money to your cost basis, should not be taxable. Once you hit the cost basis, you should start taking the withdrawals as policy loans. If you do it this way you should be able to access the money built up tax-free. The earlier you start the policy the better as a significant amount of money can be accumulated over time. I usually suggest to my clients that they overfund the policy. In other words add cash to the policy each month above and beyond the premium level. On top of the great supplemental income and tax benefits, you should have a nice death benefit to pass along to the next generation.

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