Whole life insurance: part of a tax diversification strategy
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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