Can Life Insurance Be A Suitable Retirement Investment?


Can Life Insurance Be A Suitable Retirement Investment?

If you have a lot of money, and you are looking for a way to lower your lifelong tax exposure, then Life Insurance could be a unique tool for you to use during your retirement planning. I will not get deep into the strategies in this article, but I will tell you that I have seen clients save hundreds of thousands of dollars in taxes using life insurance vehicles such as a Variable Universal Life policy as a retirement vehicle. These are only suitable investments for people who have a lot of discretionary income, a higher tolerance for risk, and are in relatively good health at the time of the initial investment. Essentially, you take out a life insurance policy for $1,000,000. You begin putting in a certain amount of money a month, let’s say $1,500 (though there are limits based on your age and the policy amount). Of this $18,000 you are investing each year, a portion will go towards paying for the life insurance that you have purchased, and another portion will go towards purchasing mutual funds on the inside of the life insurance policy. For this example, we will say that $10,000 goes towards your investments, and $8,000 goes towards insurance (but these numbers are fictitious and are only being used as an example). As you accumulate money in the inside of the policy, your insurance burden becomes less. For example, once you have $100,000 in the account, you are now only paying for $900,000 in life insurance (your original $1,000,000 minus the amount that is your money). Therefore, your $18,000 might look more like you putting $11,000 into the internal account, and only $7,000 into the insurance vehicle. As you can see, the more money that you accumulate on the inside, the less you pay for the insurance, and the more that goes into the internal account with each contribution.

Some of you may be wondering why this sounds like a good investment, but let’s play this out. The money inside of the internal account grows tax-free, and can be pulled out tax-free (provided you meet certain requirements to keep the policy considered as an insurance policy). So, this is one of the few investment vehicles where you can put several thousand dollars into it, growing tax-free, no matter how much money you make. For example, you could potentially stock away $100,000 a year which would then grow tax free if you purchase a large enough policy. The other upside, though slightly morbid, is that if you were to pass away early in the investment, your family would get the amount of the policy. For example, in the $1,000,000 policy we noted earlier, if you passed away ten years into the policy, you would have paid $180,000, and your family would receive $1,000,000. It wouldn’t make up for the severe loss your family has suffered, but it is a benefit that a simple IRA would not have afforded you.

These are extremely complex tax-advantaged vehicles, and you should consult a financial advisor before making final decisions on whether these are right for you. They are meant only for people with considerable means who are looking for both estate planning and retirement planning vehicles.

Retirement Junkie is a website that the Hagopian Institute put together as a source for free information to help people prepare for retirement.  Please visit retirementjunkie.com, and follow MrEmergingMedia on Twitter for more retirement tips, along with other fun offerings from Todd Hagopian and the Hagopian Institute.

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About Todd Hagopian (@ToddHagopian)

Todd Hagopian received his BA from Eastern Michigan University with a major in Political Science. After graduation, he worked as a Financial Advisor and a Bank Manager before returning to school. He attended Michigan State University, where he completed an MBA with a double-major in Finance and Marketing. Todd is now a Senior Product Development Manager for a Fortune 500 company. He frequently writes about business issues, social media strategy, and political issues that he finds important. Enjoy the blog!

Posted on December 21, 2011, in Investing and tagged , , , , , . Bookmark the permalink. Leave a comment.

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