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.