There are a lot of people out there saying that cash value life insurance is the devil. They say you should never, ever buy this type of life insurance. You should always buy term and invest the rest. Buy term and invest the rest is a part of your strategy, but cash value life insurance should be considered also, especially if you want to reach the zero tax bracket in retirement. There are different types of CVLI that you can consider, but the one that I’m going to talk about today is Indexed Universal Life Insurance. Here are three reasons to consider it as part of your retirement plan:
- You are guaranteed not to lose your principal investment. When you “invest the rest” in the other type of plan, you generally invest it in mutual funds or some other form of investment that is tied to the market. That means that your money can go up and down, you can experience negative returns, and you can lose money. With an IUL, your money isn’t tied directly to the market, it simply follows it. So the insurance company is able to give you a $0 floor. When the market goes down, you don’t gain anything, but you don’t lose anything either. Your money is protected. The flip side of that is that there is also a ceiling, so there is a limit on how much you can make. If the market goes up by 30%, you will only gain whatever percentage the insurance company has as the cap. If you average that out over the last 50 years though, in almost all cases it beats out investing directly in the market and experiencing negative losses.
- You have a death benefit that your heirs will inherit when you die. The best part about this is that there are two ways you can set up your death benefit. You can either keep your death benefit level for the life of the policy, or you can set it up so that your death benefit decreases as your cash value increases. The great part about that is that as you grow older and increase your cash value, you are paying for less life insurance. If you have a $500,000 death benefit and you keep it level, you will always be paying for $500,000 in life insurance coverage in your fees. If that death benefit decreases as your cash value increases, then when you have $250,000 in cash value, you are now only paying for $250,000 in life insurance, so your fees go down and more is going towards your cash value. Having these types of options make the IUL a great part of your retirement strategy.
- You get to retire tax free when you take distributions from your IUL. It sounds too good to be true but it’s not. Because of the way the tax code is written, loans from your life insurance are not taxable so you won’t have to pay income tax on the loan. Because of the way the insurance company sets up the loan, you don’t have to pay it back either.
There is one disclaimer I want to make here. Not all policies are the same and not all policies are set up correctly. Make sure you are working with a financial planner who knows what they are doing and your policy is set up correctly so that you can enjoy these benefits. Click the Connect button at the top of the site to connect with us and see what your options are.
Be blessed.
