If you are a high net worth individual looking for a way to access cash easily or borrow low in retirement, you may want to leverage life insurance. Life insurance is an essential part of an estate plan with the potential to open up cash flow while also saving you on taxes at the end of the year.
Leverage Life Insurance Now and in the Future
Whether you have universal, whole or variable life insurance policy, there is a cash value separate from the death benefit. This permanent life insurance can be used to borrow against, draw on in retirement or even invest. It can also be used against its own premium.
By building up your life insurance account, you are paying into your death benefit and cash value while also paying off the fees of account management. This enables the cash value to grow, although contributions to the cash value reduce over time as both your age and the cost of insurance go up.
When the need to access cash or finance a large expense arises – such as in retirement, for education expenses or unexpected medical costs – turning to the cash value of a life insurance policy can be a good option. Loans against your own life insurance usually require minimum paperwork, boast a quick payout and can offer flexible payback terms. Additionally, the lower rates associated with life insurance save you interest expenses over the long term.
Another advantage: tax savings. The cash value inside the account is invested. However, unlike the investments made through a brokerage account, these investments are not taxed, overall increasing your value.
Life insurance accounts are a secure way to store money, and investments help to grow the death benefit. If you have already maxed out a typical retirement account, like an IRA and 401k, adding additional savings to a cash value life insurance account may be a great next step for several reasons.
- Unlike retirement accounts, contributions to life insurance accounts are not limited.
- Withdrawals will not increase your taxable income.
- It also cannot affect Medicare coverage.
- The growth of these accounts is tax-free and age-penalty-free.
When you leverage your life insurance, your money works for you while also being accessible. Choosing the right type of permanent life insurance for you and your family depends on the type of premium you prefer, your risk tolerance and the growth you’d like to see.
Types of Permanent Life Insurance to Consider
Universal Life Insurance
- Growth is based on interest rates.
- Premiums are flexible.
- Guaranteed universal life is a type of universal life insurance that has a low cash value but a similar death benefit, as compared to other permanent life insurance.
- Indexed universal life insurance uses indexes that are capped, offering some flexibility with less risk.
Whole Life Insurance
- Growth is steady and accumulative.
- Premiums remain the same.
- Pays dividends.
Variable Life Insurance
- Growth is dependent on investments/subaccounts.
- Follows volatility of the market.
- Can have significant tax benefits.
What to Do with Your Cash Value Account
Incorporating permanent life insurance into your estate plan strategy makes sense for both the present and the future.
Since the cash value of a life insurance policy does not pay out at death, but rather is absorbed by the company that holds the account, you should consider removing the cash for your own use or passing it to beneficiaries.
Passing money on to beneficiaries can be done through both gifting and irrevocable trusts. Falling under federal gift tax guidelines, gifts of $15,000 or under are not taxed. Reducing the taxes on intergenerational or inherited funds is one way to preserve the integrity of retirement amounts.
When using an Irrevocable Life Insurance Trust, a trusted family member or attorney is a trustee to your life insurance policy. While you provide the finances to build it, you cannot make changes to it once it is created and you have contributed to it. Upon your death, the trust can distribute funds to those you choose as beneficiaries without having them face an estate tax.
Life insurance is meant, in part, to cover remaining costs left after death. The same is true for leveraging permanent life insurance. If, after death, there is a need for a business buyout, the life insurance funds can be applied. Likewise, any estate taxes can be paid out, as well.
Life insurance is just one more tool that allows you to keep your finances accessible and working for you, both now and into your future. To learn more about how to leverage life insurance to round out your estate plan, contact a Stableford financial counselor today by calling 480.493.2300 or contact us online.
