By Elliot Raphaelson
From Tribune Content Agency
Although Ed Slott (IRAhelp.com) is an expert in IRAs and other retirement plans, he consistently points out that permanent life insurance has significant advantages for long-term retirement planning. The ramifications of the SECURE Act of 2019 only magnify these advantages in contrast to investing through taxable retirement accounts.
Below I'll discuss some aspects of permanent life insurance.
- Life insurance protects against uncertain future tax rates
The proceeds of permanent life insurance are not taxed. Unless you convert your retirement accounts to Roth accounts, you will eventually pay income taxes on the distributions, and it is likely that future tax rates will be higher than current ones. Depending on the size of your retirement account distributions, you could also face increased taxes on Social Security benefits and even trigger other taxes such as an increased 3.8 percent tax on net investment income.
If you systematically withdraw funds from your retirement accounts and purchase permanent life insurance, you avoid the uncertainty of future tax rates, and the value of the life insurance grows tax-free.
- Life insurance is an investment, not an expense
You should not consider life insurance as an expense any more than you would consider investing in a retirement account as an expense. However, investing in permanent life insurance does not have stock market risk associated with it.
- Life insurance gives individuals more control over the funds
When Congress wants more income taxes from retirement accounts, it tends to change the regulations in ways that generally are unfavorable to owners of retirement accounts and their beneficiaries. The recent regulations associated with the SECURE Act force beneficiaries to withdraw funds from traditional IRAs more quickly, resulting in more taxable income for the government. Congress controls when owners of retirement accounts have to make required minimum distributions (RMDs). With life insurance, owners of permanent policies have control over whether they want to terminate life insurance or initiate loans.
- Life insurance incorporates leverage
One dollar of premiums can do the work of many, and the result is guaranteed and tax-free. Especially in the case of the early, unexpected death of the policy holder, life insurance can produce multiples of the initial investment in a retirement account.
- Life insurance mitigates market risk
It is true that during long periods in which stock and bond markets perform well, retirement accounts may outperform permanent life insurance policies. But during periods of high inflation, which we have seen lately, both stock markets and bond markets can both show very poor results. Investors who retired in the last few years are facing uncertain futures, as are their beneficiaries. Investors are now discovering that bull markets don’t last forever, and there is no guarantee that a traditional 60/40 portfolio of stocks and bonds will always guarantee a financially secure future.
Bottom line: Individuals planning for a financially secure future for themselves and their beneficiaries should consider alternatives to a portfolio exclusively containing stocks and bonds. Permanent life insurance should be considered as a part of retirement planning.
(Elliot Raphaelson welcomes your questions and comments at [email protected].)
©2022 Elliot Raphaelson. Distributed by Tribune Content Agency, LLC.
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