Professional Documents
Culture Documents
Table Of Contents
Insurance Companies Dont Just Sell Insurance ...........................................4 Life Insurance Investing ..................................................................................5
Guarantees ......................................................................................................................7
Downsides .......................................................................................................................8
Who Gets the Most Benet from Life Insurance Investing? .......................................9
Life Insurance or Annuity? ............................................................................12 Tax-Free and Tax-Deferred Income Strategies ...........................................13
Strategy #1. Using Life Insurance Cash Value for Tax-Free Income .......................13
Strategy #3. 1035 Exchange: Life Insurance Cash Value into an Annuity .............18
hat do you imagine when you think of your retirement? Perhaps you picture retirement like a long vacation: youll play golf, travel, or enjoy leisurely days by the pool. With good health, such a picture is entirely possible as long as you take action to turn those pleasant dreams into reality! However, a picturesque, happy retirement can be cut short if you run out of money. Taxes, market uctuations, ination, and unexpected living expenses can erode your nest egg faster than you ever thought possible. And what if you live to be 107? Will your retirement funds last that long? In this guide, youll discover ways to protect your assets from the tax man and set up an income plan that ensures youll never run out of money no matter how long you live. Surprisingly, these strategies involve products from insurance companies.
Whether youre just getting started in the workforce or preparing to retire, there are tactics you can use now to make strategic investments in life insurance, annuities, or both. Lets get started!
There is nothing like a dream to create the future. ~Victor Hugo, Les Misrables
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Whole Life. The oldest one is called whole life insurance. This is what originally started the trend of permanent policies. Part of your premium is used to pay for your life insurance and the rest of it builds cash value.
With whole life insurance you build up cash as you pay your monthly premium, and its kind of like a bank account. Each month the life insurance company will pay a xed interest rate on your money, and it will grow over time.
With whole life, your premium stays the same over the life of the policy.
2.
Universal life. Similar to whole life, universal life pays a guaranteed interest rate, but it changes based on the market rates.
Its a little bit riskier, because some months youll make more than whole life and some months youll make less, but it still grows over time and you dont have to manage it.
The other thing with universal life is you can change the amount you pay each month, so theres more exibility.
3.
Variable life. This type of insurance is like combining a brokerage account with your life insurance.
When you put money in variable life, you can use it to buy stocks, bonds, and other investments within the policy. You also have a choice in how to manage your investments.
That means you can make more money, but it also means you can lose money, so its a bit riskier.
Guarantees
All of these policies have a death benet, which is guaranteed to a point. Youll nd these guarantees:
1. Whole life. Besides a set, guaranteed death benet, with the whole life policy, the rate of return is also guaranteed. So you also know what youre going to get when you retire.
That means the insurance company can tell you, If you put X much money in per month, youre going to have $300,000 when youre 65. Since both the death benet and the cash value are guaranteed, youll know from the quote what the contract will provide.
2.
Universal life. With universal life, the interest rate can change over time. What the insurance company will do is give you a range, telling you what they think youre going to hit when you retire but it could be less or more.
3.
Variable life. With variable life, there typically arent guarantees. Its like investing in the stock market. They can make an estimate based on past market trends, but it really depends on how well you invest your money.
The money in your life insurance account grows tax-deferred, which means as long as you leave money in the account you dont owe taxes on it. If at some point you decide to cancel your life insurance policy and cash out all your investment gains, youll owe taxes on those gains, which isnt what you want to do. So dont cancel your policy! Instead, follow this process:
1. Get a policy loan. Say you get to retirement and you have a big pile of money in there. You can get a policy loan, which means youre borrowing money from yourself to take it out. Luckily, the government doesnt tax loans. 2. Keep the policy in force. Because its a permanent policy, at some point youre going to die and the death benet will pay o your loan. The government doesnt tax life insurance death benets.
Basically, you take your money out tax-free, and then the death benet pays o your loan and whats left over to your heirs tax-free as well.
Downsides
What could be an issue in using a life insurance policy as a tax-free investment? Consider these points:
Youll have to be healthy enough to qualify for life insurance to set this up. It might not be an option if you have serious health issues. Theres a required medical exam.
Your investment gains will be lower than if you had just invested in a stock account, because each month a little bit of your money goes towards paying for your life insurance.
If you need life insurance for a time, but then want to switch to other tactics as your needs change, youll see how to accomplish that change as well as we delve further into our strategies.
automatic, forced savings, ensuring that you provide for your future, even when youre not thinking about it.
Dear IRS, I am writing to you to cancel my subscription. Please remove my name from your mailing list. ~Charles M. Schulz (Snoopy)
Annuity Investing
Annuities are more of just a pure investment contract than life insurance. When you buy an annuity, its split into two dierent stages:
The rst stage is called the accumulation phase, which means youre putting money into your contract and the annuity company is investing it for you. Youre saving up money in an investment account.
When youre ready to retire, you convert your annuity into the payout stage. Youll have options to choose from, like, Do I want guaranteed payments for the rest of my life? Do I want guaranteed payments for 20 years? The company will tell you the payment amounts for your various options so you can get a clear picture.
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Fixed annuities pay a xed rate of return thats guaranteed. Like whole life, you know exactly what your account value will be when you retire. Theyre very safe. However, like all investments, lower risks usually provide lower returns.
With variable annuities youre investing in the stock market, so how well you do depends on the market and there are no guarantees as to your account value when youre ready to retire.
In comparison to life insurance, youll likely make more money with an annuity because youre not paying for any life insurance with your premiums.
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So, no matter how long you live, youll keep getting those payments. Plus, the amount of the payments will never go down, even if your total payments surpass that $300,000.
If you have children and need a life insurance policy, thats usually enough to swing you to investing in life insurance, because then youre hitting two goals at the same time.
If you want to retire early, the life insurance might be a better choice because there are no restrictions as to when you can take money out with a loan. With the annuity, youre supposed to keep money in there until youre at least 59 , according to the IRS. If you take out money earlier, it can lead to a tax penalty.
If your goal is to get to retirement as soon as possible with the most money, an annuity will generally have a higher account value.
If youre not healthy enough to qualify for life insurance, then an annuity is your option because theres no health exam for an annuity. Its open to everyone.
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If youre single, dont have children, and dont need life insurance, that would push you towards investing in an annuity.
I'm proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money. ~Arthur Godfrey
Strategy #1. Using Life Insurance Cash Value For Tax-Free Income
The big question is how to get guaranteed income in retirement thats taxfree. Thats the dream for everyone. Its not always easy or possible, but thats obviously the goal you want to approach as closely as possible. What would happen if you only used your life insurance cash value to fund your retirement? All your income in retirement would be tax-free.
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For this strategy to work, remember: you dont want to cancel your life insurance policy, because the minute you do, all your investment gains are taxable. However, as long as you keep your insurance policy in force, you can borrow money from it. When you borrow money, since its a loan, it doesnt count as income, so you dont have to pay any taxes on it. So each year, maybe you borrow $30,000 from your life insurance. When you eventually die, the death benet from your policy will pay o your loans so nobody else has to pay it. Life insurance death benets are tax-free, so your heirs never have to pay tax on your investment gains or on the rest of the money they receive. Important Considerations Keep these facts in mind when considering this strategy:
1. Tax-free, but not guaranteed. The downside with using life insurance for your retirement income is that it only achieves the tax-free goal. It doesnt meet the guaranteed goal.
Its up to you to gure out how much money you can take out each year so it doesnt run out. So theres a chance you can outlive your money.
2.
How much do you want to leave for your heirs? The one thing you need to balance out is your income requirements versus if you want to leave an inheritance.
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When you borrow money from your policy, you also deduct against your future death benet for your heirs. For example, if you want to leave $300,000 to your grandkids but you spend $200,000 of your $300,000 life insurance policy, theyre only going to receive the $100,000 balance.
Just be aware the more you spend from your policy, the less youll leave to your heirs.
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When your taxes are deferred, your money grows faster because theres more money to work for you throughout your accumulation phase. When you start receiving payments, part of those payments is considered to be the money you put in and the other part comes from gains. Only the part that comes from your gains is taxable, since you already paid income taxes on the money you used to fund your policy. The payments are divided into taxable and non-taxable portions based on the same proportions they make up in your account. For example, if half of your account is what you put in and half is from your gains, then your payouts reect that same 50/50 split. Half of a payout check is taxable and half isnt. Important Considerations Annuities work really well, as long as you plan properly and know its for your retirement savings. Keep these points in mind when using annuities to fund your retirement:
1. Choose carefully when you decide how long you want payouts. If youre choosing the guaranteed life option, it works great if youre going to live a long, long time, but it can be an issue if you die early.
Say youre 65 and you choose payments for the rest of your life, but you only live one more year. Youve probably only collected $4,000 of your $300,000 annuity, using our same example as before.
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Fortunately, you dont have to choose only the guaranteed life option. Many annuities let you set it up where you say, I want it for the rest of my life, but I want a minimum of 10 years worth of payments. Or you might choose a minimum of 15 or 20 years.
That means if you die in one year, at least your heirs will receive payments for the rest of the term you chose (9, 14, or 19 more years based on your option).
2.
Wait as long as possible before you start payouts. If you start receiving guaranteed payments when you turn 60, youll receive less money per month than someone that waited until 70.
The longer you can stretch out your accumulation phase, the more money youll get per month in your payout phase, regardless of which option you choose.
3.
Avoid withdrawals before age 59 . If you get stuck in a money jam and you need to take money out when youre 50, like just a lump sum withdrawal, the IRS charges a 10 percent early withdrawal penalty, which really hurts your investment gains.
So if youre putting money into an annuity, plan to lock it in until youre at least 59 .
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Strategy #3. 1035 Exchange: Life Insurance Cash Value Into An Annuity
Just because you use one product, doesnt mean you cant use the other. Perhaps you no longer have a need for life insurance and now you want those guaranteed payments of an annuity because youre retiring. Its a really easy switch to turn your life insurance into an annuity! You simply perform a transaction called a 1035 exchange. Your insurance company will have the forms to ll out. This will take all the money from your life insurance and deposit it into an annuity. This transfer doesnt count as a withdrawal, so you wont owe any taxes on this move. It will just be like you had saved in an annuity all along. From there, with your new contract, you can set up the guaranteed payments for retirement. Change Your Plan as Your Needs Change with No Tax Consequences Your nancial needs change over time. When youre in your 30s with children, you need the life insurance, but once youre in your 60s and the kids are gone, you might not. So this is an exit strategy. There are no taxes involved.
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Maybe you dont have quite as much money as if you had just used an annuity your whole life, but you may have needed life insurance, so that wasnt an option anyway. Important Considerations 1. This is a one-way street. You can turn life insurance into an annuity tax-free, with a 1035 exchange, but you cant go the other way. You cant turn your annuity into a life insurance policy. 2. Its a permanent decision. Its also important for you to know that once you make this move, youve lost your insurance. You cant change your mind a couple years later and get it back.
As you get older, your health may change and it will be harder to qualify for life insurance. So you may be giving up that opportunity for the rest of your life.
You can base the annuity on both your lives, which means as long as one of you is alive youre going to be collecting payments, or
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You can base payments based on one person, for example, just basing it on the husband. However, if the husband dies, the payments stop, so the wife wouldnt have any more income.
When you base an annuity on one person, its obviously a lot riskier, but you get signicantly more money. Depending on the age, you get 20 or 30 percent more per month. If you base it on two people, you get less money, but at least its a safer retirement. The Solution: As an example, a husband could get life insurance on himself and then do the annuity based on his life, because as long as hes alive, theyre collecting that larger income. If he dies rst, the annuity payouts would stop, but his wife would collect the death benet from the life insurance (tax-free), which she could use to fund the rest of her retirement. Hopefully, they both live very long and collect that higher income for the rest of their lives, but then theyre also protected in case the annuity spouse dies. If the wife dies rst, the husband keeps getting the higher annuity payments he has been getting all along. For this strategy, because its a bit more complicated, its important to sit down with a life insurance agent or nancial planner to make a plan that works for your situation.
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You can get always get free annuity and life insurance quotes online, but when youre doing a more complicated strategy like this, it helps to sit down with a professional. You dont want to make a mistake here. Younger vs. Older Investors Its better to plan sooner with this strategy. If youre in your 30s or 40s, thats the time to buy the life insurance policy because youll likely be healthy enough to qualify for an aordable rate. If you wait until youre in your 60s or 70s, you cant really do this anymore, because you wont be able to buy a large enough policy, and you might not be able to qualify at all. You can get the annuity at any time, but if you get it when youre young and add funds to it on a regular basis, you have the advantage of letting your money work for you for many years of tax-deferred growth before you switch it to the payout phase.
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guaranteed income for life without an annuity, which means paying at least some tax. Strategies two, three and four do delay taxes until retirement, which gives your investment more momentum to grow. Plus, with annuity income, only part of each payout is taxable. Youll pay less tax with strategy number four, where you use life insurance and an annuity, because the life insurance death benet will be tax-free.
The question isn't at what age I want to retire, it's at what income. ~George Foreman
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However, there are companies online that specialize in putting together rate quotes. For example, AnnuityQuotes.com will send you a few quotes from major companies if you enter in some information.
Points To Ponder
Its really something to consider, this match up with life insurance and annuities. Were at a time when most of us dont have pensions, so its hard to nd a way to guarantee income in retirement. This really became clear a few years ago when the market crashed. Stock portfolios were falling apart and interest rates on bonds and bank accounts disappeared. Setting up an annuity with guaranteed income is really the only way now for most people to get income for the rest of their life. The tax advantages are just icing on the cake!
Money isn't everything...but it ranks right up there with oxygen. ~Rita Davenport
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