Retirement planning through the use of loans from an insurance policy is reviewed as well as how some insurance types can actually help to generate tax free wealth. With the different types of insurance policies available, clients must be aware of how these policies can affect the growth on the money in their policy should they take a loan against the policy.
There have been thousands of wealthy individuals who have relied on cash value life insurance as an investment option to help them grow wealth in a tax favorable manner. When this is done, they will receive money from the insurance policy in the form of tax free loans during their retirement against their policy that act as a retirement income stream. While there are pros and cons to doing this, the aim of this article is not to argue whether life insurance policy loans should be implemented. Actually, in most cases, there are policies from select companies that can be beneficial for wealth building. However, cash value policies are seldom created equally. There are a lot of bad policies out there, so it is important to be informed and make sure the policy you are choosing will in fact provide the best financial benefits. Overall, the concept of using Cash Value Life Insurance to generate wealth tax-free is a pretty good idea. For those that make more than $100,000 a year income, it works much like a Roth IRA without contribution limitations.
Equity Indexed Life Insurance
When deciding what type of life insurance policy to purchase, clients will be faced with a large selection. We place preference on Equity Indexed Life Insurance policies. This is our choice because these policies will provide a minimum guaranteed rate of return on an annual basis. In addition, the growth of the policy is in line with the S&P 500. To make things even better for clients, some Equity Indexed Life Insurance (EILI) policies will even credit 140% of the S&P 500 returns annually.
Cash Value Life Insurance : Generating Wealth Tax Free
One of the most commonly asked questions is how a life insurance policy can generate more income than other methods, such as a brokerage account. Keep in mind that the ultimate goal is to increase the amount of money available during retirement and reduce the amount that will have to be paid in taxes. When using a life insurance policy, clients will not owe taxes on the amount of growth in the policy. To sweeten the pot, there are no dividend capital gains or capital gains taxes either.
Should I Choose Life Insurance Policy Loans?
When a client wishes to gain access to money that is in a policy, the policy owner must borrow the amount they need. These loans will not be seen as a source of income, so there is no need to pay income taxes on the amount that is borrowed from the life insurance policy. Even though there are no taxes, policy loans are actual loans and there will be interest affixed to the amount that is borrowed. These loans can be difficult to explain and understand. To help, we will use an example to clarify what policy loans really are and how they can be used.
Example of Policy Loan Use
We will use an example of an individual that has a life insurance policy with a $220,000 cash-surrender value. The owner of the policy has the ability to call the insurance company and ask to take a loan from their policy. For this example, we will assume the loan amount is $11,000. The client will get the money from the policy and will be charged interest on the amount. If the current loan rate is 7%, that amount will be charged to the insurance policy each year. Since the client has not borrowed all of the money from the policy, what remains will continue to grow. The question is, what rate will the amount grow at? This all depends on the crediting rate. If the rate of credit is 5.5%, then there will be a shortage on the amount of interest that the client owes. If this happens, it is very possible that the cash value remaining in the policy will begin to decrease as a result.
Example of Wash Loan
If a wash loan was chosen instead of a policy loan, things would be a bit different. In this case, the remaining balance of the cash in the policy does not have to be applied towards the interest on the loan. Should the interest rate be 7%, that 7% would be credited on the money that has remained in the policy. In easy terms, it is a neutral transaction and the crediting rate washes out the interest rate.