Whole life insurance: part of a tax diversification strategy

Retirement
4 MIN READ | #blog

Whole life insurance, a type of permanent life insurance, is widely known simply for one of its main benefits: it offers guaranteed protection for your loved ones after you’re gone.1 In fact, a whole life policy provides coverage for your entire lifetime, with payments that will never increase. Your family won’t have to worry about what might happen to them when you aren’t around to provide financial support.

What you may not know are the many other valuable benefits that whole life insurance offers. Aside from the valuable death benefit it offers, whole life is considered a tax-advantaged asset.2 Whole life policies with living benefits may allow you to withdraw funds tax-efficiently to cover expenses, or even to pay for things you’d like to do — the cash value is yours to use, however you like.3, 4 Used smartly, it can protect more of your hard-earned savings.

Based on today’s high tax rates, $1 million saved in your conventional, workplace 401(k) savings plan could likely cost you hundreds of thousands in taxes when you withdraw the money.5 If that shocks you, then consider this: You can help lessen that tax impact by purchasing a tax-advantaged whole life policy. Here is one example of how whole life insurance can help insulate your retirement savings from taxes.

Depend on your policy’s cash value

When you purchase whole life insurance, you not only get protection for your family, you also build cash value within your policy that generally isn’t taxable, even if you withdraw  it while you are still enjoying your retirement. For instance, let’s say you need cash to buy a retirement condo on the beach. If you withdraw $100,000 from your traditional 401(k) — and you have a total effective tax rate of 28 percent — you could owe $28,000 in federal taxes.6

But if you have a whole life insurance policy, you could consider withdrawing half of the money from each financial instrument — $50,000 from your 401(k) and another $50,000 from the cash value of your whole life policy. The whole life part of this withdrawal isn’t taxable up to the cost basis (premium paid), so you theoretically could save $14,000 in taxes in this example.7

The important life question

The life you worked so hard to build is not only important to you, but also to the people who depend on you — your spouse, your children, and everyone else in your life in need of your love and help. That’s why life insurance is regarded as such a valuable piece in the puzzle in helping to protect you and your loved ones. You can speak to a financial professional to learn more about why this is an approach to consider for your retirement strategy, and how it can help you keep more of what you’ve earned.

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SOURCES:

1 All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values. 

2 Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. 

3 Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.

4 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty. 

5 https://www.nerdwallet.com/article/taxes/401k-taxes 

6 Taxes are due on the 401(k) account since the money contributed to that account is on a pre-tax basis. We are assuming that the $100,000 has a client in a 28% effective tax bracket. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. 

7 Taxes are due on the 401(k) account since the money contributed to that account is on a pre-tax basis. However, no taxes are due on the Whole Life cash value. We assume that the $50,000 has a client in a 28% effective tax bracket. 

DISCLAIMERS:

Guardian and its affiliates, subsidiaries, employees, agents, and outside contributors are not authorized to provide legal, tax, or investment advice in the materials of this website including but not limited to any blogs. The information provided does not constitute a solicitation of an offer to buy or an offer to sell financial or insurance products. Individual situations can vary; please contact a financial professional, your tax, investment, or legal advisor for guidance and information specific to your situation. Guardian is not responsible for the consequences of any decisions or actions taken in reliance upon or as a result of the information provided by this material. To learn more about Guardian, visit GuardianLife.com.