What is a good vehicle to generate retirement income in this low interest rate environment? Believe it or not, maximum funded Life Insurance.
Kiplinger Magazine published an article in late October, 2016, “5 Ways Life Insurance can Pay Off before you Die.” The article says, “Life insurance can provide more than just a death benefit. I believe it’s an underutilized asset class, and its potential is especially important in today’s weak-interest- rate environment when it’s difficult to generate much of a return without taking risks.” The article goes on to say, “Some policies even allow access for long-term care needs.”
Why would you want to maximum fund the cash values? Because they are afforded certain tax benefits that other vehicles are not. Here’s how it works. Normally, when you buy a life insurance policy, you try to pay in the lowest premium for the highest death benefit. In this situation, you try to do the exact opposite: pay in the highest premium for the lowest death benefit. The result is a policy geared towards cash value growth and not reduced by a high cost of insurance.
Specifically, retirement income generated by life insurance offers the following advantages:
- tax preferences when set up properly.
- potential protection from claims of creditors in certain states.
- Downside market protection.
Although small, a death benefit comes along with this. If that death benefit exceeds your current insurance amount, you may consider dropping your old policies and save those premiums you no longer spend. If the old policies have cash value, you may be able to do a life insurance 1035 exchange and avoid the taxable gain on those old policies when structured properly.
Be careful though, there is always a cost for the life insurance which can reduce your income payments. Take a look at a computer illustration to see exactly how the policy performs, what the income payments are and what the guarantees are. Also, if you pay in more premiums than you should, the policy could be treated as a Modified Endowment Contract. Be sure to consult your tax advisors and use a good insurance expert to structure this.