What do you imagine when you think of your retirement? Perhaps you picture retirement like a long vacation: you’ll play golf, travel, or enjoy leisurely days by the pool. With good health, such a picture is entirely possible – as long as you take action to turn those pleasant dreams into reality!
However, a picturesque, happy retirement can be cut short if you run out of money. Taxes, market fluctuations, inflation, and unexpected living expenses can erode your nest egg faster than you ever thought possible.
And what if you live to be 107? Will your retirement funds last that long?
In this guide, you’ll discover ways to protect your assets from the tax man and set up an income plan that ensures you’ll never run out of money – no matter how long you live.
Surprisingly, these strategies involve products from insurance companies.
Among your options, you can now enjoy the higher yields of a variety of stock market investments along with tax-free or tax-deferred gains. Plus, you can find these perks all within venues that carry the added security of guaranteed death benefits or income for life – benefits that are lacking in traditional retirement plans.
Whether you’re just getting started in the workforce or preparing to retire, there are tactics you can use now to make strategic investments in life insurance, annuities, or both.
Let’s get started!
“There is nothing like a dream to create the future.” ~Victor Hugo, Les Misérables
When you think of life insurance, you might not think about it as an investment because, with many policies, you just get insurance. If you die while the policy is in force, your beneficiary gets the death benefit. This type of insurance is called term insurance. It provides security for your family if you should die.
However, there are also various permanent policies that build up cash value. This is money you can take out and spend while you’re alive. You don’t have to wait until you die to get money from the insurance company.
It can be a good strategy to buy life insurance and save for the future with the same contract.
There are several types of permanent life insurance policies for different investment goals:
- Whole Life. The oldest one is called whole life insurance. This is what originally started the trend of permanent policies. Part of your premium is used to pay for your life insurance and the rest of it builds cash value.
- With whole life insurance you build up cash as you pay your monthly premium, and it’s kind of like a bank account. Each month the life insurance company will pay a fixed interest rate on your money, and it will grow over time.
- With whole life, your premium stays the same over the life of the policy.
- Universal life. Similar to whole life, universal life pays a guaranteed interest rate, but it changes based on the market rates.
- It’s a little bit riskier, because some months you’ll make more than whole life and some months you’ll make less, but it still grows over time and you don’t have to manage it.
- The other thing with universal life is you can change the amount you pay each month, so there’s more flexibility.
- Variable life. This type of insurance is like combining a brokerage account with your life insurance.
- When you put money in variable life, you can use it to buy stocks, bonds, and other investments within the policy. You also have a choice in how to manage your investments.
- That means you can make more money, but it also means you can lose money, so it’s a bit riskier.
All of these policies have a death benefit, which is guaranteed to a point.
You’ll find these guarantees:
- Whole life. Besides a set, guaranteed death benefit, with the whole life policy, the rate of return is also guaranteed. So you also know what you’re going to get when you retire.
- That means the insurance company can tell you, “If you put X much money in per month, you’re going to have $300,000 when you’re 65.” Since both the death benefit and the cash value are guaranteed, you’ll know from the quote what the contract will provide.
- Universal life. With universal life, the interest rate can change over time. What the insurance company will do is give you a range, telling you what they think you’re going to hit when you retire but it could be less or more.
- Variable life. With variable life, there typically aren’t guarantees. It’s like investing in the stock market. They can make an estimate based on past market trends, but it really depends on how well you invest your money.
With life insurance, there’s a tax loophole that, if you use it correctly, your gains are tax-free.
The money in your life insurance account grows tax-deferred, which means as long as you leave money in the account you don’t owe taxes on it.
If at some point you decide to cancel your life insurance policy and cash out all your investment gains, you’ll owe taxes on those gains, which isn’t what you want to do. So don’t cancel your policy!
Instead, follow this process:
- Get a policy loan. Say you get to retirement and you have a big pile of money in there. You can get a policy loan, which means you’re borrowing money from yourself to take it out. Luckily, the government doesn’t tax loans.
- Keep the policy in force. Because it’s a permanent policy, at some point you’re going to die and the death benefit will pay off your loan. The government doesn’t tax life insurance death benefits.
Basically, you take your money out tax-free, and then the death benefit pays off your loan and what’s left over to your heirs tax-free as well.
What could be an issue in using a life insurance policy as a tax-free investment?
Consider these points:
- You’ll have to be healthy enough to qualify for life insurance to set this up. It might not be an option if you have serious health issues. There’s a required medical exam.
- Your investment gains will be lower than if you had just invested in a stock account, because each month a little bit of your money goes towards paying for your life insurance.
If you need life insurance for a time, but then want to switch to other tactics as your needs change, you’ll see how to accomplish that change as well as we delve further into our strategies.
Life insurance investing is especially advantageous if you can’t qualify for a regular retirement plan.
For example, there are income restrictions for IRAs. If you’re making too much money, you’re not allowed to use an IRA. Plus, if you don’t have a 401(k) at work, that doesn’t leave you with many options for tax-advantaged investments. Need guidance in this area, let’s talk.
Life insurance doesn’t really have any income restrictions, so anyone can set up a plan like this as long as they’re fairly healthy.
Plus, if you want life insurance to protect your family, it’s an added benefit to be able to save for tax-free income later on all within the same contract. And if it’s hard for you to invest regularly, permanent life insurance offers automatic, forced savings, ensuring that you provide for your future, even when you’re not thinking about it.