Investing in a retirement account such as a 401(k) and/or an IRA is typically considered the foundation of a successful retirement savings strategy. However, these retirement accounts have limitations – such as contribution limits for high income earners. And distributions will typically have a penalty tax if taken prior to age 59½.
High income earners, who are currently maxing out their IRA and/or other retirement plan contributions, often seek additional tax-advantaged vehicles to supplement retirement income. For these individuals – particularly parents with dependent children – using the tax advantages of variable universal life insurance may be very appealing.
Unlike IRA and Roth IRA contributions, with life insurance there is no funding limit based upon IRS limits or an individual’s annual income. Funding limits are based on the amount of insurance purchased, along with the underwriting and age of the insured. As a result, policy owners can deposit more than they need to keep the insurance in force to take advantage of the savings component of life insurance. In addition to providing a valuable income tax-free death benefit for beneficiaries, these polices also provide savings in tax-deferred, mutual-fund type subaccounts. These subaccounts give you greater control over how your cash value is invested and the potential to grow your cash value more quickly, but they also expose you to market risk and could potentially lose value. Your death benefit and the cash value available to you are directly impacted by the performance of your subaccounts.
There is no IRS 10% penalty tax on cash value distributions prior to age 59½, which differs from IRAs, retirement plans and annuities. This allows the policy owner to access the cash surrender value prior to retirement age, if needed. In addition, when the policy owner begins to take distributions from the contract at retirement (or any other time), the cash value can be paid out income tax-free, via policy loans and withdrawals. One thing to keep in mind: all life insurance policies are different and have various fees and charges, including withdrawal charges. You must also be able to qualify medically and financially via the insurance company’s underwriting process to purchase insurance.
| Variable Life Insurance | Taxable Investments | Qualified Plan/Traditional IRA | Roth IRA | Municipal Bonds | |
| Tax-Favored Withdrawals | Yes | No | No | *Yes | Yes |
| Mandatory Distributions | No | No | Yes | *No | No |
| Income Tax-Free Death Benefit | Yes | No | No | *Yes | No |
| Tax Penalties for Early Withdrawals | No | No | Yes | *Yes | No |
| Income Based Deposit Restrictions | **No | No | Yes | Yes | No |
| Cost of Insurance Charges | Yes | No | No | No | No |
Adding variable universal life insurance to your portfolio can be a great complement to your existing retirement income savings tools by offering additional protection and tax-advantages. Your financial advisor can help you determine your life insurance needs and show you how variable universal life insurance can be part of your portfolio.
* Roth IRA distributions are not required during your lifetime and are income tax free when withdrawn after a five-year holding period and age 59 ½ for first-time home purchase ($10,000 limit), or after disability or death. Withdrawals of after-tax contributions (basis) prior to age 59 ½ are not taxable or subject to the 10% penalty, but earnings withdrawn in a non-qualified distribution would be taxable and may be taxable and subject to a 10% penalty unless an exception applies. Roth IRA death benefits are income tax-free as long as held for 5 years but are required for non-spouse beneficiaries.
** Premium funding limits are based on the amount of insurance purchased, and the underwriting and age of the insured individual.
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.