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Totally Complimentary Pull As Well As Lose Business Intelligence Tools – When saving for retirement, a 401(k) plan is a great place to start, especially if your employer matches a portion of your contribution. But where do you go after you’ve contributed the maximum match amount or if your place of employment doesn’t offer a qualified retirement plan? Many workers continue to fund their workplace plan, but there are other options, including using a life insurance policy.

In certain cases, approaching insurance as an investment can be a wise move, but usually for wealthier investors. However, investors who have maxed out their allowed 401(k) and Individual Retirement Account (IRA) contributions should evaluate whether the significant benefits of life insurance policies would outweigh the potential tax benefits for them.

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Using life insurance policies to save for retirement can benefit the wealthy. However, given the significant cost of these policies, everyday investors may be better advised to use a simpler vehicle, such as an IRA.

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Between these two strategies, the IRA is the simpler way to save for retirement. You create an account with a brokerage firm, mutual fund company or bank and choose the investments you want to make with your contributions. These can include anything from individual stocks to mutual funds and gold bars.

The main advantage of these accounts is their tax treatment, which is similar to a 401(k). With a traditional IRA, your qualified contributions are tax-deductible and investments grow on a tax-deferred basis. Retirement withdrawals after reaching age 59½ are taxed at your income tax rate.

A Roth IRA is similar, but the tax treatment and benefits are different. You invest using after-tax dollars, meaning there is no tax deduction in the year of contribution. However, you don’t pay a dime in additional taxes on the accumulated funds, as long as you’ve owned the account for at least five years and turned 59½ before you make a withdrawal.

There are annual limits on how much money can be deposited into an IRA. The annual contribution limit for traditional and Roth IRAs in 2022 is $6,000 (increasing to $6,500 in 2023), and if you’re age 50 and older, you can contribute another $1,000—called a contribution following.

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For non-Roth 401(k) plans, the maximum contribution for the 2022 tax year is $20,500 (rising to $22,500 in 2023) plus a $6,500 additional contribution for those 50 or older (rising to $7.500 in 2023). After retirement, you’ll pay ordinary income tax on any amount you withdraw.

Another possible route is to purchase permanent life insurance. In addition to offering a death benefit to your survivors, these policies also have a savings component. A portion of your premium goes towards your death benefit; another part builds your cash value account, which grows on a tax-deferred basis.

Permanent life insurance policies are a bit complicated. Every time you pay a premium, a portion of it goes into a cash value account. With a whole life insurance policy, the carrier credits your account for a certain percentage based on how its own investments perform. If you’ve had your policy for several years, you’ll typically see annual returns in the 3% to 6% range, often earned in tax-free investments.

Other types of permanent life insurance work a little differently. For example, with a variable universal life (VUL) policy, the loan amount is linked to the performance of the stock and bond funds of your choice. The potential returns are higher, but so is the risk. If the market loses ground over a period, you may have to pay a higher premium to maintain your coverage.

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Investors who rely on life insurance for retirement needs should think long-term—it can take 10 to 20 years to build a substantial cash value account. Once your balance is large enough, there are several ways you can use your policy for personal needs. Paid-in additions (PUAs) are a good way to increase the amount of cash value in a policy for low relative costs, which can maximize retirement income.

Another possibility is to make periodic withdrawals. As long as you don’t draw more than your base—that is. how much you paid in premiums – you won’t get a tax hit for it. Any additional amount is subject to ordinary income tax rates. To keep the Internal Revenue Service (IRS) at bay, some people stop making withdrawals once they reach their bottom line. From there, they take out a loan against their policy, which is usually tax-free.

Another option is to surrender the policy and receive the cash value in one lump sum, minus any outstanding loans. But there’s an important catch: Every time you take money out, you reduce the death benefit for your heirs. If you take a loan against the policy, you have to pay it back with interest to repay it again. And if you surrender it, you’ll likely lose coverage entirely.

Compare this to someone buying a much cheaper life insurance policy that has no savings feature and investing the difference in an IRA. They can draw down on their savings at any time after age 59½ without affecting the insurance or its payout if you die. And they can leave the remaining balance to their family members, which cannot be said for your cash value account.

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Perhaps the biggest knock on permanent life insurance policies is their upfront cost. First, there is the initial fee that helps pay the agent’s commission. Often, this can eat up half of your premiums for the first year. Consequently, it takes several years for your cash value to start growing.

Moreover, policyholders tend to face large investment fees, often around 3% per year. In contrast, the average expense ratio for open-end mutual funds and ETFs offered for sale is between 0.5% and 1.0%. So investing in an IRA allows you to eliminate this significant drag on your returns.

But that’s not all. You also have to worry about surrender charges if your policy lapses within the first few years. You will lose not only your death benefit, but also a significant portion of your cash balance. With most policies, the amount of this fee is gradually reduced over a period of several years and then disappears.

However, if you are committed to long-term strategies, permanent life insurance policies designed to accumulate additional cash value will tend to terminate even around the tenth policy year. On top of that, the cash accumulates every year before, so if you do surrender the policy, you’ll get some money back and won’t be left out of the full amount of premiums you paid.

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For example, wealthier individuals will sometimes set up what is known as irrevocable life insurance so that their heirs can avoid estate taxes. Technically, the trust pays the premiums for the life insurance policy, so the death benefit is not considered part of the deceased family member’s estate.

In addition, life insurance is sometimes a sensible choice for everyday investors who have maxed out their allowed 401(k) and IRA contributions. But even then, it’s worth assessing whether the significant fees outweigh the potential tax benefits.

Agents make a lot of money selling the idea that life insurance is a great way to save for retirement. But given the significant cost of these policies, you’re probably better off buying a low-cost policy and investing in something simpler, like an IRA.

Does not provide tax, investment or financial services and advice. The information is presented without regard to the investment objectives, risk tolerance or financial circumstances of any particular investor and may not be suitable for all investors. Investing involves risk, including the possible loss of principal. Investors should consider hiring a financial professional to determine an appropriate retirement savings, tax and investment strategy.

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Requires writers to use primary sources to support their work. These include white papers, government data, original reporting and interviews with industry experts. Where appropriate, we also reference original research from other reputable publishers. You can learn more about the standards we follow for producing accurate, unbiased content in our editorial policy. She picks up the cube and examines it from all angles. To my untrained eye, her task seems insurmountable. This Rubik’s Cube, with its nine colored stickers covering each side at seemingly random points, will soon be solved.

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