The Life Insurance Retirement Plan

The Life Insurance Retirement Plan?

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When Financial Advisors speak about reducing income taxes, they frequently discuss a strategy known as the “Three Buckets.” Each bucket represents the tax status of the financial savings vehicles you may use to help finance your retirement. The Tax Now bucket contains savings accounts, money market accounts, CDs, stocks, bonds, and mutual funds. The Tax Later bucket, also referred to as Tax Deferred, contains vehicles such as 401(k), IRAs, 403(b), 457s, SIMPLES, SEPs, and Keoghs. The Tax Never bucket, or Tax-Free bucket, contains a Roth IRA and a Life Insurance Retirement Plan, or LIRP. To qualify as a Tax-Free plan, two conditions must be met.?

1. The money must be free from all taxes such as Federal, State, and Capital Gains tax.?

2. The money withdrawn from the account cannot count as Provisional Income, defined?as your Adjusted Gross Income, non-taxable interest, and half of your Social Security Benefits.?

Provisional income sources are Social Security, IRAs, 401(k), 403(b), any 1099 interest, employment income, rental income, and money from Municipal Bonds. In the overall scheme of things, the money you place in a Life Insurance policy is Income you earned, so consider that portion of the money taxed. What is not taxed is the interest earned inside the Life Insurance policy thanks to IRS rule 7702, which defines the criteria that Cash Value Life Insurance policies must meet to qualify for a Tax-Advantaged status.

The two criteria are the Cash Value Accumulation Test (CVAT) and the Guideline Premium and Corridor Test (GPT). Most policies available today meet these criteria. The advantage is in how the distributions are disbursed from the Insurance company. When a customer requests to withdraw money from the policy, it is paid as a loan from the Insurance company, and the Death Benefit (DB) is used as collateral. It can be repaid, and the DB will be provided as per the contract, or you can choose not to repay the loan, and the Insurance company will recoup any unpaid loans before disbursing the Death Benefit.?

The result is a concept only available in a Life Insurance policy. When a policy is structured in this manner, the owner can take advantage of the Cash Value accumulation and withdraw the money for his/her use. Then upon the death of the owner, the beneficiaries receive the death benefit tax-free for their use. In California, most families survive with the help of two incomes. The loss of one prematurely can force the living spouse to sell a home and move to a less expensive neighborhood, forcing the children to change schools and leave friends during an emotional period where stability would be the most crucial factor in emotional healing after a loss of a parent.?

This is the only financial savings vehicle that offers this dual benefit, but there is a catch. The amount of?death benefit one can qualify for is based on their earning potential, and the amount of premium is based on the individual’s health and age. Not everyone will qualify, and of those that do, there are additional questions of?suitability and affordability. In other words, the Insurance company will ask if this is the best option available for the policyholder and if the policyholder can afford the premium payments. But if those conditions are satisfied, an individual or family and use a Life Insurance policy as part of a financial portfolio designed to provide a comfortable retirement income much higher than Social Security alone can provide. ?