Whole life is a great product to buy and the younger you are when you buy it, the better off you are. When you buy whole life insurance you lock into the mortality of the age of purchase. In other words, the younger you are, the lower the mortality of the policy and the lower the premium is you lock into. The premium of whole life never increases, so it will remain level until age 100.
On top of locking into the mortality of whole life, it is also beneficial to get the policy going early from a cash value perspective. The earlier you start the more time you have to accumulate a very significant amount of cash value inside of the policy. The cash value can be used for policy loans to buy things during the course of your life, make investments, etc. The cash value also can grow into a substantial amount of money and can be used as a source of retirement income. The money grows inside of the policy on a tax-deferred basis and can be drawn out in retirement on a tax free basis. The way that you would do this is to take withdrawals from the policy until you reached your cost basis. The withdrawals wouldn’t be considered taxable as it is return of the money you have contributed. Once you reach the cost basis, then you start taking money out with preferred policy loans. Some interest will be charged, but you will avoid paying taxes on the loans.
It is great to have a permanent whole life policy when you reach retirement. Many folks will be ending their terms and have no insurance. It will allow you to have insurance into your retirement years and have a very reasonable premium.
I recently got a comment from one of our blog entries about not explaining how to tap the cash value tax free. I wanted to devote this entry to explaining how to use this valuable asset with out paying a penny of tax. The key to the cash value is to building it by putting money into it for a period of time. Once you have built it up a little bit, then you can start pulling it out to buy whatever you want during your lifetime. You pull it out as a preferred policy loan and all you have to do is bay the interest to the insurance company. Typically the interest rate is like 6-7%. The key to growing the cash value over time is to pay back the loan and pay it back above the insurance loan cost. I like to pay back at about 10% and amortize over 4 or 5 years. This money just goes back into your account and the spread above the insurance companies interest goes directly into your policy to turbocharge it.
In regards to tapping the money from the permanent life insurance policy for tax-free retirement, you should use this strategy. Start by withdrawing from the policy up to your cost basis for initial income. Since it is cost basis it is not taxable. Once you withdraw the full cost basis, you start taking money out as preferred policy loans. The policy loans come out of the policy tax-free and the only cost is the interest on the loan.
