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Life insurance as tax diversification Thumbnail

Life insurance as tax diversification

College Planning Retirement Funding Taxes Small Businesses

Too often individuals and their Tax Preparers take the immediate gratification of reducing today's taxes by deferring taxes.  But at some point in retirement, you have to pay the piper (and by piper, we mean the IRS).  Often times we see individuals nearing retirement with 80%-95% of their assets tax deferred (IRA, 401k).  This leaves little 'tax diversification' for income planning.  

1. Minimize Taxes in Your Retirement

Tax diversification and creating tax advantageous income is an important element of the planning process. Many investment advisors disclose that they cannot advise on taxes.  We find that taxes are often your greatest expense and great value is provided by working with a firm that has a Certified Tax Specialist ™.  

The cash value in a life insurance policy:  

  • is not subject to Capital Gains tax as the account grows
  • is not subject to State and Federal tax on properly structured income distributions
  • does not trigger an Inheritance Income Tax to your heirs

2. Use to Fund Your Child’s College Tuition

Your cash value life insurance policy could benefit you sooner than you think. Unlike retirement assets that often aren't available without penalty till 59 1/2, the cash value life insurance policy does not have age restrictions for distributions.

Additionally, a properly funded cash value life insurance policy can cover your student's education but also have an annual income stream in retirement for either the parent or your child.  Talk about a gift that keeps on giving.

529 plans have been the traditional investments for college savings, but with drawbacks. Those drawbacks include investment losses, restrictions on uses, and a 529 plan will affect access to financial aid 1

3. Explore Living Benefits

Beyond your Child's College Tuition, the ability to access cash value at any age can be used for "Being your Own Bank" (BYOB, not to be confused with bring your own beer).  Properly funded cash value life insurance can be used to take loans for new vehicle purchases, business liquidity, vacations, medical bills with repayment terms you set and interest that in part gets paid back to your policy.

Living benefits can provide financial assistance in the form of chronic illness (Long Term Care) benefits in which you can receive aid for assisted living or home health care.  

4.Not all life insurance policies are created equal

Cash value life insurance policies are not a one size fits all.  Additionally, interest earned, cash value accessibility, and Long-Term Care benefits vary widely between national companies.   In fact, some life insurance agents can only "offer" you their company’s product where other independent life agents can "shop" dozens of potential carriers that fit your needs.  When in doubt, realize that a custom-tailored suit will always fit and feel better.  Of course, you always want to check on the specifics of your individual policy. 

In conclusion, a cash value life insurance policy provides tax diversification for your income needs and is an important part of your overall retirement strategy.  If taxes are a concern now or in retirement, seek out a qualified fiduciary financial advisor or Certified Tax Specialist TM.  Feel free to leave me your comments or reach out using the link below.





1 https://www.savingforcollege.com/article/yes-your-529-plan-will-affect-financial-aid

GuideSpring Wealth Strategies, LLC is a Registered Investment Advisory Firm, with Nathan Wilson being a Certified Tax Specialist ™ and Certified Estate & Trust Specialist ™

The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.  All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any individual financial decisions.  All information and ideas should be discussed in detail with your individual adviser prior to implementation.