Life Insurance Consultant
When preparing for retirement, there are many different paths one can take to achieve one’s income goals. While life insurance plans are traditionally not thought of as ways to build wealth used in retirement, certain policy structures can assist with this.
For those who are familiar with permanent life policies, you are probably aware of the cash value account that grows over time as the policy matures, based upon a pre-determined rate of return. Some who own these types of policies might see the cash value as a secondary feature to the death benefit, while others see another source of tax-deferred income that can be utilized as a compliment to their existing retirement savings. This type of policy is known as a LIRP.
A LIRP is a life insurance retirement plan that is purchased with the dual purpose of providing supplemental retirement income while also locking in a guaranteed death benefit. How do these work? When you pay premiums for a LIRP, part of that premium is put into the cash value account that can be accessed by the policyholder during the life of the policy, while the rest is put towards maintaining the death benefit guarantee. If the intent is to maximize the amount of cash, overfunding the cash value and electing for a lower death benefit is the way to go. Here are some ways to use the cash value for retirement benefits:
Borrow Against Cash Value: You can take out a loan against the value reflected in your policy. If you take cash out as a loan, you will not be subject to taxes on those dollars even if it is above your cost basis (the total premiums the policyholder has paid into the policy). Taking a loan means you can essentially pay yourself back what you took out of the policy over time at an interest rate determined by the insurance company, often between 5% to 8%. This is an effective way to achieve tax-deferred income in retirement, with most policies allowing up to 90% of the cash value to be borrowed. If you elect not to pay back the loans, the outstanding balance will be deducted from the available death benefit at time of claim.
Withdraw Cash Value: You may also withdraw directly from the cash value. You can withdraw up to your cost basis without incurring any taxable events. Anything you choose to withdraw that is above basis will be subject to tax implications, since those dollars were accumulated due to interest earnings or investment gains. Note that any withdrawal amount will reduce the death benefit since there is no option to pay it back.
Surrender Cash Value: If you feel the need for a life insurance policy is no longer there, you may choose to surrender your policy for the cash surrender value. The amount depends on how much cash value you’ve accrued and any outstanding loans balances you carry at the time of surrender. Be mindful that most policies have a surrender fee that the insurance company charges, but that fee tends to decrease as the policy matures and can phase out over the life of the policy. Same as withdrawals, any amount above your cost basis will be subject to tax implications.
Using a LIRP should never be the primary source of retirement income, but can be a nice supplemental source to help complete the retirement portfolio as a whole. Give the experts at Wholehan a call to discuss if a LIRP could be advantageous for your clients!