By Mike Gibbons, RICP®
As a financial advisor, one of the most common questions I get is, How can I lower my taxes? You have probably asked that question yourself more than once. Most people are already familiar with saving in a tax-advantaged retirement account. However, those accounts have contribution limits that aren’t high enough for higher-income earners preparing for retirement. Another retirement option is to invest in a taxable brokerage count, but those come with an annual tax bill. What many people don’t realize is that life insurance can be used as a tax-deferred investment vehicle.
How Permanent Life Insurance Works
Life insurance is a contract between you and an insurance company saying that in exchange for a premium that you pay, they will pay a death benefit. Some are for a set time and some are permanent. Permanent life insurance means that you maintain coverage as long as premiums are paid. For both kinds of life insurance, the death benefit is paid out tax-free, so the beneficiaries don’t have to pass any of it on to the IRS.
With permanent life insurance policies, you can build up something called cash value, which is like investment growth. The cash value accrues tax-deferred, just like the earnings in a traditional IRA or 401(k). The accrued cash value can be used to pay premiums or it can also be taken as a loan from the policy.
How To Use Life Insurance As An Investment
Life insurance is typically thought of as protection against the risk of premature death, which is true. That is the primary purpose of life insurance. However, that’s not its only use. It can also be used as an investment that grows tax-deferred and can provide income in retirement.
When you purchase a permanent life insurance policy, the premium is allocated to both the death benefit and the cash value. To use it as an investment, you want as much allocated to the cash value as possible. A good financial advisor can help determine the best way to structure the policy to meet your needs.
In retirement, you can take out the amount that you paid in premiums (your tax basis) tax-free since the money had already been taxed before being used for premiums. Any withdrawals that you make will count as the return of your tax-free tax basis until you have made up for all of the premiums. Once you have exhausted your tax basis, you can borrow the cash value tax-free. Your life insurance policy can make you loans to supplement your income, and since they are not official withdrawals, you do not have to pay any taxes on them. In this way, you can create a tax-free income stream for yourself in retirement.
How I Can Help
To use life insurance as an investment, you need to have a properly structured policy in order to receive the maximum possible benefit in retirement. Also, you must strategize withdrawals carefully to avoid lapsing the policy. If you want to learn more about using life insurance to mitigate your tax expenses, we at Gibbons Financial Group can help. With several decades of experience under my belt, I can answer your questions and help you to determine if this strategy makes sense in your specific situation. Call 224-419-5550 or email me at Mike@gibbonsfinancialgroup.com to schedule a complimentary consultation.
About Mike
Michael J. Gibbons is founder and president of Gibbons Financial Group, an independent advisory firm providing custom-tailored financial planning and investment management services to pharmaceutical and healthcare professionals and their families. Mike has over 25 years of experience and spends a significant portion of his day working with pre-retirees and retirees, focusing on asset management, Social Security and pension planning, as well as retirement income preparation.
Mike has degrees in both business and psychology from Lake Forest College and currently holds his Retirement Income Certified Professional (RICP®) designation from the American College. Mike was named a Five Star Wealth Manager for 2016 and 2018* Mike is heavily involved in his community, having served on the Village of Gurnee Police Pension Board as a Community Volunteer and the St. Patrick’s Parish Financial Board. When he’s not working or volunteering, Mike loves playing golf and spending his time with his wife and children. To learn more about Mike and how he can help you, connect with him on LinkedIn or visit his website.
*Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2016/2018 Five Star Wealth Managers.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.