Treating Life Insurance As a Diversifying Asset Class

Preston Rosamond |

If you have started planning for retirement, you have likely opened up one or several tax-advantaged accounts such as an IRA, 401(k), or a Roth IRA. Lowering your tax liability is one of the most efficient ways to keep more of the money you make. Unfortunately, these accounts have contribution limits and are not available to those making above a certain income. What many people don’t realize is that life insurance can also be used as a tax-deferred investment vehicle. 

How Permanent Life Insurance Works

Life insurance is a contract between you and an insurance company saying that in exchange for a premium that you pay, they will pay a death benefit. Some are for a set time and some are permanent. Permanent life insurance means that you maintain coverage as long as premiums are paid. For both kinds of life insurance, the death benefit is paid out tax-free, so the beneficiaries don’t have to pass any of it on to the IRS.  

With permanent life insurance policies, you can build up something called cash value, which is like investment growth. The cash value accrues tax-deferred, just like the earnings in a traditional IRA or 401(k). The accrued cash value can be used to pay premiums or it can also be taken as a loan from the policy.

How to Use Life Insurance As an Investment

Life insurance is typically thought of as protection against the risk of premature death, which is true. That is the primary purpose of life insurance. However, that’s not its only use. It can also be used as an investment that grows tax-deferred and can provide income in retirement. 

When you purchase a permanent life insurance policy, the premium is allocated to both the death benefit and the cash value. To use it as an investment, you want as much allocated to the cash value as possible. A good financial advisor can help determine the best way to structure the policy to meet your needs. 

In retirement, you can take out the amount that you paid in premiums (your tax basis) tax-free since the money had already been taxed before being used for premiums. Any withdrawals that you make will count as the return of your tax-free tax basis until you have made up for all the premiums. Once you have exhausted your tax basis, you can borrow the cash value tax-free. Your life insurance policy can make you loans to supplement your income, and since they are not official withdrawals, you do not have to pay any taxes on them. In this way, you can create a tax-free income stream for yourself in retirement.

How I Can Help

To use life insurance as an investment, you need to have a properly structured policy to receive the maximum possible benefit in retirement. Also, you must strategize withdrawals carefully to avoid lapsing the policy. If you want to learn more about using life insurance to mitigate your tax expenses, we at The Rosamond Financial Group can help. With several decades of experience under our belt, we can answer your questions and help you determine if this strategy makes sense in your specific situation. To get started, book a free introductory meeting online! See what clients are saying about working with us.

About Preston

Preston Rosamond is a financial advisor and the founder of The Rosamond Financial Group Wealth Management, LLC with over two decades of industry experience. He provides comprehensive wealth management and financial services to successful business owners, corporate executives, and affluent retirees who enjoy simplicity and seek a professional to help them pursue their goals. Preston personally serves his clients with an individual touch, a sincere heart, and his servant’s attitude is evident from the moment you meet him. Learn more about Preston or start the conversation about your finances with him by emailing or schedule a call on his online calendar.