A life insurance retirement plan is really a variable life insurance plan that is purposefully overfunded. The insurance provides higher liquidity than other retirement savings plans like individual retirement accounts, 401-Ks, and simplified employee pension plans for small business owners or the self-employed.
The premiums for these policies can be high. People that own their own business or are reasonably wealthy can use this form of retirement investing as a means to avoid taxes and provide more liquidity to their retirement portfolio. A person’s entire retirement plan should never be based on a single product including this option.
How is the plan funded?
A life insurance retirement plan is funded just like any variable life insurance plan. An individual makes yearly or monthly payments into the policy until the amount of money in the policy is sufficient to make the premium payments for you. Most plans are fully funded after 10 years of premium payments.
Some people that use this tool as a retirement plan fund the entire policy when they acquire the policy. This action can produce some advantages but may be illegal depending on the value of the policy. You never have to pay premiums. You have a tax-free source of loans that are easily available for emergencies.
What are the advantages of this investment strategy?
There are several advantages to a life insurance retirement plan including tax advantages that are superior to IRAs, 401-Ks, and SEPs, withdrawals are not penalized by any tax, and loans can be taken from the plan or made on based on the value of the plan.
The most important aspect of any retirement investment is avoiding paying taxes. The funds that are invested in a life insurance policy are not taxable because the money that you fund the plan with has already been taxed.
The funds in the plan accumulate value at a specified rate of return that is not subject to tax.
Unlike most other retirement schemes, the plan allows you to withdraw funds tax-free before the age of 59 and one-half. No other investment for retirement allows tax-free withdrawals at any age.
In the event that you become disabled, the plan can be set up so that you can receive the entire value of the policy in a lump sum or receive regular annual or monthly distributions. The idea is to pay for the expenses of daily living for your family as well as any added health care needs if you are disabled.
Unexpected financial needs can be met with loans from the plan. The loans can be repaid to re-establish the complete value of the plan or the value of the plan proceeds can be decreased by the amount of the loan.
Selecting a life insurance retirement plan depends on your personal financial situation and should be undertaken with the advice of a financial expert that specializes in retirement law and planning.