Does A Life Insurance Product Have A Place In Your Retirement Portfolio?
Posted on: 12 December 2015
Retirement saving can be really confusing and unfortunately, you usually do not find out that you do not have the right allocation or investments until you have taken a major loss. Figuring out tax deferred versus tax exempt can be mind boggling, and when you add in various insurance products, it can really begin to muddy up your mind. Unfortunately, if you are going to be successful in planning your retirement, you need to figure out how all of these products will factor in your future.
What Is Tax Deferred Versus Tax Exempt?
Tax Deferred
Most employers offer a wide array of tax deferred retirement options, or tax deferred accounts (TDA). Not only do these accounts allow you to take an immediate tax deduction in the year that you make the investment, but they also reduce your reported taxable income for that year. These can be extremely beneficial, especially if you are trying to stay under a certain income level to qualify for specific benefits. Some common forms of these accounts include:
- 401(k)
- 403(b)
- 457
- Traditional IRA and others
Any taxes that you must pay on this money will be paid years later once you have begun to make your withdrawals.
It is the belief that during this time you will probably have a lower taxable income and be in a lower tax bracket. Unfortunately, no one knows what the tax brackets or your income will look like thirty years from now.
Many employers may be willing to match a certain percentage of funds that invest in these types of accounts. If this is the case, you will want to invest as much as you have to in order to get your full employer match. If not, you are leaving free money on the table.
For example: If you make $50,000 and your employer is willing to match up to a 6% investment of your salary, you would be leaving $3,000 per year on the table if you do not take advantage of that. By investing $3,000 in a TDA, your taxable income would be reduced to $47,000 and you would have $6,000 per year (your investment + your employer match) growing in your retirement account.
Tax Exempt
On the other hand, if you invest in a tax exempt account (TEA), you will make your investment with after tax dollars, but whatever earnings that accumulate in your account will grow tax free. Not only will they grow this way, when the funds are withdrawn, they will remain this way. This means that you will not owe taxes, nor will they become a part of your income, once they are withdrawn. Some of these products include
- 529 plans (when used for future educational needs)
- Stocks
- Bonds
- Mutual funds
- Insurance products
While you may have considered some of these investments, many people do not consider adding life insurance to their portfolio.
How Will Life Insurance Help Me Save For Retirement?
For years, many people have frowned upon cash value insurance products as a retirement account investment. While the products are not designed to be your only retirement vehicle, if properly designed and funded, some of the various whole life products on the market can be really attractive. Insurance products can:
- Produce some very attractive compounded growth returns - When you are talking about your retirement funding, you want to ensure that your funds are going to have guaranteed growth from year to year. No matter how good a mutual fund is, they are not able to give you that guarantee. Since your rate of return is tied directly into the market, if the market collapses, you lose money. With a whole life product, if the market crashes, you may not realize a gain, but you do not have to worry about taking a loss.
- Give you ongoing access to your cash value, interest, tax, penalty free - The last thing that you want to have to do when you need money is jumping through a lot of hoops and then worry about penalties and fees months later when it comes time to file your taxes. With whole life products, you will not have those worries. You will be able to borrow from your policy at any time and for any reason. Many companies will even allow you to borrow these funds interest free. Just remember that borrowing from your account will impact the return that your policy is able to produce while you have these funds out.
- Guarantee that you will always be insurable - Many times people often lose their life insurance when they retire from the workforce. This forces them to have to pay exorbitant rates for term polices when they are up in age. If you have incurred certain health conditions, you may even find yourself uninsurable, or forced to take out a final expense, or burial policy. With a whole life product, your insurance will be in place for the rest of your life, or however long you choose to keep your policy.
These are just a few of the reasons why whole life products would be an asset that you may want to consider placing in your retirement portfolio. Although they may not have been popular products in the past, you owe them another look. Visit a site like http://www.mattroenkerinsurance.com for more information on life insurance.
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