A Single Vehicle That Can Provide Tax-Free Growth Now & Tax-Free Income Later 

In recent years, the idea of using life insurance contracts as a means of supplementing retirement income has become increasingly popular.  The growing popularity of Life Insurance Retirement Plans (LIRP's), or Life Insurance Asset Accumulation Plans (LIAAP's) can be attributed to several factors.

• As the future of Social Security has become less certain, people have become more certain that they need to save for their own retirement.

• Tax law changes have reduced the amount highly compensated employees can contribute to their qualified plans.  The contribution maximum is now based on the first $150,000 of compensation only. Corporate downsizing has reduced people’s confidence in company retirement plans.

• In general, Cash Value Life Insurance is becoming increasingly recognized as offering one of the most flexible ways to grow & access accumulated assets--income tax-free. 

Here are the key reasons why a Variable Universal Life Insurance contract (“VUL”) can serve as a particularly attractive LIAAP for you: 

1.  You can maximize its cash value build up: 

One of the key benefits of accumulating retirement assets within a life insurance contract is that those assets grow tax-free now and can be accessed tax-free later.  Better still, to “qualify” for that tax-free access you only have to purchase a minimum amount of life insurance.  This approach, referred to as “max funding” the contract, uses less of the growth/gains to pay for insurance and leaves more to continue compounding within the contract.  The example on the next page shows how effectively this approach can meet asset accumulation and retirement income needs.  Note that to reap the real benefit of this approach, one should consider funding their Life Insurance retirement Plans until age 65 or even Age 70 and if starting their plan late you may want to “force feed” or contribute as much as possible in the early years of the contract (i.e. 5-7 years) to build up cash value even faster. 

2.  The plan offers superior investment flexibility: 

Like other types of retirement plans, a LIAAP offers you the opportunity to participate in the growth potential of professionally managed equity investment sub accounts or portfolios, and to periodically rebalance investments to maintain a specific asset allocation.  In addition to growth options, VUL contracts also typically offer fixed accounts or other income options.  So, once you retire you can easily switch to options that will generate the income needed each year while keeping principal intact. 

3.  You can access contract values income tax-free whenever you want:

A LIAAP provides a very flexible source of tax-free income.  Unlike 401(k)s and IRAs, there are no penalties for withdrawals before age 59 1/2 - and no minimum distributions required beginning at age 70 1/2.  There are also several ways to access LIAAP assets.  First, you can simply withdraw assets tax-free up to your cost basis and after that, you can take “wash” or no-cost loans against the policy’s value.  Many policies assess a charge on outstanding loans but also credit the same or nearly same interest rate back to the contract’s cash value during the loan so there’s essentially no charge to take money out of the contract. 

4. The plan “self-completes” if something happens to the owner: 

Rather than being a negative the life insurance component of the plan offers a real advantage ensuring that if you die prematurely your financial plans can still be fulfilled.  The insurance benefit that is passed income tax-free to the beneficiaries can be used to “complete” the process of funding the goals the contract was initially established to address.

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