A Closer Look at Using Life Insurance for Tax-Free Income in Retirement
Paying taxes in retirement is a big no-no for many individuals. If you wish to receive tax-free income in your retirement days, life insurance might be a way to make it possible!
Covid-19 has shaken up everybody about their finances and made them more aware of their future. That is why Boomers and Gen Xers are planning ahead of time for retirement plans that will help them maintain their living standards. But tax bills on top of your retirement income can significantly cut down those retirement dollars. Reducing taxes on your retirement income is necessary as people are often surprised when they realize how much they have to pay in taxes each year.
People should start looking for tax-free income sources before investing in a retirement plan to save more retirement bucks and reduce unknown levels of taxation in the future. But how can you do this? There are many ways, but we suggest using life insurance. Here’s a closer look at using life insurance for receiving tax-free retirement income.
How does this method work?
Instead of investing in retirement plans that produce fully or partially taxed income, you can cut down taxes on your retirement income by integrating distributions from life insurance. By investing in a properly structured life insurance policy, you are safeguarding your family’s interest and creating policy cash values. When you reach your retirement, you can easily withdraw money from the cash value or request tax-free loans that can help reduce tax bills.
Why Life Insurance?
Just like other retirement plans or investment modules, the initial phases of investing in life insurance are accumulation stages. 10 to 15 years later, when your policy is fully ripe and accumulates cash value, distribution can start.
Many modules and policies can give you tax-free income, but life insurance can be a more cost-efficient vehicle because of its distribution structure. For instance, it is easier to withdraw basis first in a tax-free manner with life insurance. Then there are policy loans that are also tax-free and offer you tax-free death benefits.
Life insurance is a more effective retirement strategy compared to 401K, 403B, IRA, etc., accounts that are always subject to taxes.
- Permanent life insurance allows you to transfer the asset to your beneficiaries without any income or estate tax.
- These types of life insurance policies will become more essential as individuals can rely less on social security and Medicare.
- If you plan to transfer your wealth to a shelter and think that estate and income taxes are going to skyrocket in the next few years, then permanent life insurance can help and might be the best option for you.
- There are other ways to reduce your income and estate taxes as well. For instance, irrevocable life insurance trusts, maxing out retirement accounts, or maybe you’d like to pass it to heirs as part of your legacy.
We will be discussing all of these ways in this article. Let’s have a more profound and closer look at life insurance policies for reducing taxes on retirement income.
Benefits of Life Insurance Policy; Ensure Tax-Free Retirement Income.
Generally, when people think about life insurance, they think about what they will be leaving behind for their loved ones. The ever-rising federal deficit, stumbling healthcare crisis, and uncertain future of social security have made people realize that government security nets will not sustain the fall. And it is probably not going to get better during your life span.
However, tax-deferred growth of cash inside a life insurance policy is not vulnerable to the whims of government-run social security, Medicare, and rising taxation. The life insurance money supplements your retirement income and pays for medical care- regardless of government benefits and social security.
If you are collecting income from social security, you should be aware that you could have to pay income tax on up to 85% of the benefits. The case is drastically different with life insurance policies. Cash Value that grows within a life insurance policy will not increase taxation on your income from social security.
Irrevocable Life Insurance Trusts
For those individuals with higher net worth, one option is Irrevocable Life Insurance Trust (ILIT). It purchases insurance policy directly to exclude it from one’s estate. To purchase a survivorship life insurance policy, you will have to make a cash gift to pay the premium on the ILIT. The ILIT is the owner and the beneficiary of the survivorship policy. This means that, when the insured dies, their heirs will not pay the estate income taxes out of the estate proceeds; they will be covered by the death benefit.
Planning To Give It All Away?
Most people want secure life insurance to see their money working for their heirs- in their lives and after. If you are also one of them, you might need to consider giving cash to them today.
This is for the most significant benefit because your heir can use the money to buy a life insurance policy on your life. In the meantime, you will be able to see and cherish the moments when your heirs will carry forward your legacy- in your life.
Moreover, you will be able to reduce your taxable estate by the amount of your gift. And since your loved ones are the owner and beneficiaries of the life insurance policy, they will not have to worry about estate or income tax on the death benefits or worry about paying income taxes on the growth of the policy’s cash value in your life.
