Having enough resources to live comfortably in retirement is a top priority for many. Yet, being hit with an unexpected tax burden is likely something we'd all like to avoid. Unfortunately, taxes don't stop when your paycheck does, but there are certain investments that provide retirees with better tax advantages than others. A life insurance policy with a cash value component, often referred to as a whole life policy, is one way to set up a tax-free source of income in retirement as well as providing some tax advantages in the coming years.
What is a Whole Life Insurance Policy?
Much in line with its name, a whole life insurance policy provides protection for your entire lifetime. There are several types of whole life policies, but the most common type of policy is a level premium policy that provides an affordable life insurance solution with continuous policy premiums. The death benefit will remain the same on the policy for the life of the contract, but this type of insurance policy also develops a cash value. The cash value accumulates over time and can be borrowed against to supplement retirement, pay for emergencies, and help pay for college.
Some whole life policies also pay dividends, which can be used either to increase life insurance protection or to grow cash value. Owners of a whole life insurance policy will find that they receive several tax advantages from this particular coverage.
The Tax Benefits of a Life Insurance Policy
When planning for retirement with various investment vehicles, it's helpful to know the role that taxes will play in each of them so that some level of diversification is present. Some investments will be tax-free, some tax-deferred or tax-deductible, and others just plain taxable. The best news about a whole life insurance policy is that it is among the few investment vehicles that could offer a source of supplemental retirement income on a tax-free basis.
Cash value earnings on the policy accumulate either tax-deferred or tax-free, depending on whether the proceeds are paid out while living or as a death benefit. If distributed at death, the proceeds are not a part of the probate estate and, in most cases, the death benefit is not subject to federal taxes. If the policyholder chooses to borrow against the cash value to supplement retirement, a portion of any payments could be treated as a tax-free recovery of investment.
When a Life Insurance Policy is a Good Fit for Retirement Planning
Whole life insurance policies are attractive because they offer valuable coverage and provide many tax benefits. Yet, the policy may not suit the needs of everyone. Experts recommend considering this type of coverage if you've already maxed out other retirement vehicles, such as IRAs and 401(k)s and still have a life insurance need. Also, if your income or assets are at a level that could expose you to estate tax issues, whole life insurance is an ideal choice.
Planning for retirement is easier and less expensive the sooner you start. Although it's not an ideal option for everyone, a whole life insurance policy provides long-term protection at a fixed price along with a tax-favored cash value component. Even if you determine that you don't need a whole life insurance policy, term life insurance is a very affordable option. Contact us with any questions, to request a needs assessment or to request a quote.