Tax Advantages of Life Insurance
Life insurance has special tax advantages that can be utilized to create extraordinary results. A properly structured life insurance policy will provide:
1. Tax-free cash accumulation
2. Tax-free income
3. Tax-free death benefits
Policies Can Be Used to Create a Tax-free Income Stream
Policies can be utilized to accumulate funds to provide the policyowner with tax-free retirement income. The plans can be structured to meet whatever a policyowner’s retirement income needs may be. There are no limits on contributions, and contributions can be varied from year to year. The policyowner can access the money in his policy on a tax-free basis at any age and in any way. Money can be taken out in a lump sum, in equal installments over a period of time or on an as-needed basis. In corporate America, these plans are commonly used for key executives, where contributions are made until normal retirement age, at which time the policies are tapped for tax-free retirement income. These plans are frequently used by professional athletes and entertainers who generate high incomes but only for a limited number of years. Their plans are structured to have very large contributions, but typically contributions are only made for four to ten years. A profession athlete may retire by the time he/she is age 30 and can start taking his/her tax-free retirement income at that age for the rest of his/her life. Many individuals use these plans instead of contributing to a qualified retirement plan or as a supplement to the qualified retirement plan provided by their employer.
How Does the Cost of Insurance Impact a Policy?
A frequently asked question is how much of the return credited to a policy is eaten up by the underline costs of the insurance policy. For properly designed policies, that cost is about 50 basis points for insureds ages 45 – 50. It will be lower for younger insureds and higher for older insureds. So, if the return to a policy averages 6%, the policy will deliver benefits over time equivalent to an after-tax compounded annual return of 5.5%. In comparison, if an individual receives a 6% taxable return, their after-tax return will likely be in the 3.5% to 4.5% ranged. Life insurance, when properly structured, can be a powerful planning tool to accumulate cash and provide tax-free retirement income.