When you purchase permanent life insurance, whether it’s an indexed universal life or whole life policy, some of your premiums go into a separate account that builds cash value alongside or in addition to your death benefit. One of the advantages of this is that you will have the ability to withdraw or borrow against this cash value. This can be very helpful to you in the event you lose your job or want to supplement your income or strategically lower your taxable income during a tough year in your retirement. Now, you will need to keep in mind that loans and withdrawals will lower your death benefit unless they are repaid. And if you borrow more than the surrender value, your policy could lapse.
As mentioned already, there can also be tax advantages to getting cash from your life insurance policy for supplementing your income during retirement. Funds that are borrowed against the policy are 100% tax-free. And any funds that are withdrawn from the policy could be taxed. This will depend on whether you are still withdrawing from the premium paid into the policy or if you are withdrawing interest that has been credited to the cash value account.
Let it be said that permanent life insurance should never replace your retirement accounts. Nor should it replace your term policy if it will not provide the full amount of coverage needed to protect your family in the event you were to pass away. Instead, it should only be utilized after maximizing other tax-free, tax-advantaged, and tax-deferred retirement accounts such as a 401k, Roth 401k, IRA, and Roth IRA. If you need a certain amount of life insurance to protect your family, and your budget will only allow for a smaller amount of coverage with the permanent policy, be sure to supplement with term insurance to fill the gaps. Never forgo the full amount of coverage you need to pursue this strategy.
The best candidates for this strategy are usually going to be younger individuals who need life insurance, are of good to excellent health, and will have consistent disposable income after exhausting their traditional tax-free, tax-advantaged, and tax-deferred retirement accounts to fully fund their policies for maximum growth. This will give those who are financially dependent on the insured the protection they need in the event of the insured’s death. If living benefits are included or added, this will give the insured financial protection in the event of critical or chronic illness, allowing the insured to access the death benefit while alive, tax-free. Finally, the policy owner will accrue cash during the life of the policy that will be tax-free for loans against the policy and tax-deferred for any interest withdrawn from the policy over the premium amount that has been paid in.
So, while this isn’t a good fit for everyone, it can be a great solution for those who are good candidates. If you’re looking for a permanent policy to provide protection to you and your loved ones, as well as the potential for providing supplemental income to you in the future, let us know.
Here are ways you can get in contact with us:
Phone: 866-353-9228
Email: info@angelwingslife.com
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