Yeah you read that right. In a recent story over at CNBC, How to Invest for a (Mostly) Tax-Free Retirement life insurance is actually given a little a tip of the hat!
Clearly, the world is coming to an end. The mainstream financial media usually takes great pleasure in beating up on whole life insurance and all types of cash value life insurance for that matter. What's more…they typically take a few swipes at life insurance agents just for good measure.
Here's the excerpt that speaks specifically about life insurance:
Insurance for income
It's not likely, however, that you'll have enough assets in a Roth IRA to provide all you'll need for retirement. The next stop in the search for tax-free income is the insurance agent.
With the collapse of traditional pensions, insurers have seen increased interest in annuities, which produce guaranteed monthly payouts in exchange for a chunk of your savings.
When funded by a Roth IRA, one type of annuity—an immediate fixed annuity—gives its owner an income stream that's not only tax-free but guaranteed for life. Even those funded by taxable savings can yield low-tax income because each monthly payment contains a small slice of your premium, which has already been taxed.
The life insurance retirement plan is another, more specialized, income-bearing product. Essentially a massively overfunded universal life policy, a LIRP allows the owner to withdraw the policy's excess cash tax-free and take loans that will be repaid from the benefit when the owner dies.
Not everyone agrees that insurance is the best source of income, tax-free or not. Because the company has to take its cut and pay a death benefit, fees attending these investments tend to be high.
In addition, annuities require relinquishing control of your cash for long periods, if not permanently. A standard tool in many retirement planning schemes, annuities are more often used to guarantee that basic expenses are covered rather than to avoid taxes. And all but their most ardent advocates agree that the costs and complexity of LIRPs make them a solution more for high earners who have maxed out conventional retirement savings vehicles and are still seeking shelter.
Now obviously we're big advocates of using life insurance as an income generating vehicle in retirement and maybe the rest of the world is coming around? Hard to say.
If this is something you're curious about, reach out to us, we'd love the opportunity to show you how WE do it.
I have to applaud Jim for having the guts to recognize the viability of this option publicly. For years and years the LIRP (or other acronym that ends up saying Life Insurance Based Retirement Plan) has been the cornerstone of deferred compensation planning, and available to everyone. One technical issue I have with terminology, though: you can’t technically “overfund” a universal life policy without avoiding a MEC/modified endowment contract, which is necessary for this strategy to work. More correctly, you “max-fund” (maximum premiums up to policy calculated guidelines) the contract. Thanks for the article!
I preach this on a daily basis! In fact one of the Life Companies I represent offers a tax free lifetime income benefit with their IULs! When placed on a spread sheet next to a traditional qualified program, the IUL far out performs in almost every way! And just an FYI other than no-load mutual funds, most of the UL versions of life insurance actually have lower fees!