6 Steps to a Tax-Free Retirement

Life insurance is first and foremost exactly that—life insurance. Everyone needs it, but most do not know about the vast benefits available to them! The opportunities within indexed universal life insurance are astounding! In a nut shell, it is a Roth IRA on steroids. Let me explain how this works:

STEP 1: Types of Life Insurance

Term Life—Provides a guaranteed death benefit at a fixed payment rate for a limited period of time.
Whole Life—Provides lifetime death benefit coverage for a level premium payment.
Variable Life—Invests the cash value in a wide variety of separate accounts, similar to mutual funds, and the choice of which of the available separate accounts to use is entirely up to the contract owner.
Indexed Universal Life—Combines permanent insurance coverage with greater flexibility in premium payment, along with the potential for greater growth of cash values.

STEP 2: Death Benefit

We start with the cost for purchasing the death benefit. This is the underlying base of the policy. Think of it as a term insurance policy that you invest in for the duration of your life. Life insurance companies have various ways of using the money invested to pay for this death benefit. Some pay out dividends to their policy owners (whole life), while others invest the money directly into the stock market in the hopes of capturing the entire movement of the market (Variable policies.) The companies we work with employ a strategy called indexing that we will explain in just a moment.

STEP 3: Overfund

After the death benefit is covered, the company creates a “bucket” where the owner of the policy can begin to aggressively overfund their policy. This creates an accumulation of excess money inside the policy.

STEP 4: Indexing – The Opportunity

As with any other indexed fund or product, we have a variety of ways to link the excess premiums to single or multiple indices. By indexing, rather than directly participating in the market, we keep the principal safe within the policy. The only risked money is the yield that we spin off each year. By doing this, we eliminate downside risk while still effectively capturing the gains of the market. This money then grows tax-deferred within the policy.

STEP 5: Tax-Free Retirement

Now this strategy really gets powerful! At any point in time you can withdraw money from a policy and pay the taxes on the growth. However, Indexed Universal Life has a provision in them for policy loans—the IRS CANNOT tax these loans. In essence, the goal is to create a bucket of money that grows tax-deferred and will continue to accumulate until it can do three things:

  1. Continue to link with the market providing constant market growth.
  2. Still pay the cost of insurance so that no more premiums need to be made in retirement.
  3. Provide a tax-free retirement supplemental income stream by borrowing against the death benefit!

STEP 6: Benefits of Indexed Universal Life vs. Traditional Savings Vehicle

  • No Limits—There are no contribution limits to an indexed universal life insurance policy.
  • No Early Withdrawal Penalty—Borrow money to make interest-free purchases before retirement age and pay back the policy rather than the bank for retirement.
  • Tax-Free Loans—Completely tax-free withdrawal opportunities.
  • Long-Term Care—We can now accelerate the death benefit to provide LTC in cases of chronic or terminal illness. Think of it as reaching into the grave and pulling money back to use while you are still alive!
  • Tax-Free Death Benefit—This may seem obvious, but most people do not think about their traditional savings vehicle creating a significant tax problem for their beneficiaries. With indexed universal life, the death benefit is entirely tax-free.

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