Many experts tell us that when we retire, it can be important to have several options in income sources, some of which are tax free. Tax rates are going up for a lot of us, starting with the expiration of the Bush tax cuts at the end of 2010. Now is the time for baby boomers to think about and make plans for generating tax free retirement income.

Let’s briefly review some of the available options for doing that:

  • Income tax-free death benefits
  • Tax-deferred growth of cash values
  • Tax-free recovery of cost basis (premiums paid) via withdrawal
  • Tax-free policy loans, including loans using the tax-deferred gain inside the policy
  • The caveat to the tax free retirement strategy is that the policy MUST mature as a death claim. If a policy with loans greater than the premiums paid (cost basis) lapses prior to death, then all un-taxed gain becomes taxable as ordinary income in that year.

Who should consider using life insurance as a savings plan?

  • People who do not have an employer sponsored retirement plan, such as a 401(k), 403(b), or 457 deferred compensation plan
  • High income earners that do not qualify for tax-deductions for an IRA, or who cannot contribute to a Roth IRA
  • Lifetime net savers that already max out contributions to IRA, 401(k), 403(b), and 457 deferred compensation plans, who seek another tax shelter with little or no risk to principal.
  • Business owners that want to selectively reward key employees on a discriminatory basis, as well as save for their own benefit using both business and personal dollars
  • Individuals who want the freedom to retire earlier than 59½ without penalty taxes
  • Individuals who want freedom from Required Minimum Distributions forced upon IRA and tax-qualified accounts by the IRS at age 70½
  • Individuals that do not trust the government to keep their promises, who fear that the retirement plan rules will change for the worse
  • Anyone that believes income taxes are going up in the future, because of the excessive spending problem the federal and state governments have
  • People who have little or no earned income, who cannot contribute to an IRA, but want to shelter their passive income for the future (passive income includes rent, stock dividends, bond coupons, and other interest income that requires no “sweat of the brow” effort).
  • Risk averse individuals that have been burned by losses in stocks, bonds, direct participation programs, and mutual fund investments
  • Conservative investors that want a very secure, low to no risk alternative to further diversify their portfolio
  • Parents and grandparents that want to earmark savings for a child or grandchild’s college education, where income and assets are going to make need-based financial aid problematic, or where the investor wants to avoid the tax-traps of 529 College Savings Plans, Education IRAs, and the spend-thrift risk of gifts to minors under UGMA/UTMA rules.
  • Individuals that already own term life insurance, or other forms of life insurance that are not investment grade — because they can convert an insurance expense into an asset that grows, and recover those term premiums using special tax benefits inside the Internal Revenue Code.

Who should NOT use life insurance as a savings plan?

  • Individuals who have impaired health that makes the cost of the insurance significantly greater than the taxes and fees that other investments have.
  • Anyone looking for short-term investment
  • Anyone not willing and able to adequately fund their life insurance
  • Any ‘do it yourself’ type that avoids doing business with a qualified professional life insurance agent that specializes in using investment grade life insurance as a savings alternative.
  • Anyone that puts off their agent when he or she calls to conduct periodic policy reviews, as these reviews are crucial to the proper maintenance and upkeep of an investment grade life insurance policy.

If you would like to see a FREE proposal for an investment grade life insurance policy to see how this strategy works, contact us today!

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