Using Permanent Life Insurance in Retirement Planning: Tax-Free Income Source

Permanent Life insurance, particularly a well-funded Whole Life policy, can serve as a valuable third bucket of money for retirement income, complementing traditional 401(k)s and Roth IRAs. Its primary appeal in retirement is the potential for tax-free access to capital.

The Retirement Strategy: Policy Loans

Once you are in retirement (and preferably over age 59½ to avoid potential MEC penalties), the cash value can be accessed via policy loans. The key tax advantage is that:

• Loan Access is Tax-Free: Loans are generally not considered taxable income, providing an important source of liquid funds that won’t increase your Modified Adjusted Gross Income (MAGI) or affect taxes on Social Security benefits.
• Tax Diversification: This allows retirees to draw from the tax-free bucket during high-tax years, leaving tax-deferred assets (like 401(k)s) to grow further, a strategy known as tax diversification.

Funding and Timing

To be effective in retirement, the policy must be funded aggressively early in life, typically using the PUA rider, to maximize the cash value accumulation during your working years.

Disclaimer: This content is for informational purposes only and is not financial or legal advice. This is a complex strategy that requires coordination with a certified financial planner and tax advisor.