4. Lifetime Benefits of Life Insurance
A permanent life insurance is more than just death benefit, it has powerful lifetime retirement and tax benefits too. Funds in a permanent life insurance policy can double as a retirement savings account, but without the worry about what future tax rates will be.
If these funds are needed in retirement they are accessible, tax- and penalty-free. That is a big deal, because if the funds were in an IRA, distributions would not only be taxable (in a traditional IRA), but that increased income could trigger other so called “tax torpedo”.
These are hidden tax increases in the form of phased-out deductions, tax credits, exemptions and other benefits as income increases. For example, an income increase from an IRA distribution could cause more Social Security benefits to be taxable or the trigger the 3.8 percent additional tax on net investment income from capital gains, interest and dividends.
Accessing funds from a life insurance policy are tax-free (up to cost-basis; and thereafter if taken as policy loans against the tax-free death benefit) so they don’t increase income. And in fact, the withdrawals keep taxable income and taxes lower in retirement. These are valuable lifetime benefits, in addition to the death benefit.
In our next blog post, we will discuss another feature of permanent life insurance - greater control.