Life Insurance

Life Insurance & Retirement Planning

Peachie Thompson · June 3, 2021

Today's medical advances allow people to live much longer than ever. It is critical for a financial advisor to help make sure clients do not outlive their retirement funds or that chronic illness does not derail a well thought-out financial plan.

Let's talk about the stages that your client's retirement money goes through:

  1. Client puts money in
  2. Money grows
  3. Client takes money out

A successful retirement investment strategy would have consistent long-term investment growth. Which means that your client's assets continue to grow through each stage.

So, what your client puts in should be the smallest amount of money. As it grows, it should be worth more at the end of the accumulation phase. With continued potential growth, the amount the client is able to take out should be much more than the previous two stages.

Now, here are some good news and some bad news:

  • The bad news is that the IRS will require the client to pay taxes on at least one of these three stages.
  • The good news is that the CLIENT gets to decide which stage.

Depending on the investments your clients choose, they can choose to pay taxes on the money they put in, the growth or the money they take out. When do your clients want to pay taxes? Experience tells me that people like paying taxes on the smallest number on the sheet, in this case - the money that was put in.

So how can you, as the financial advisor help client with this goal, make sure your clients do not outlive their retirement money as well as address their concerns about long term care? There are a number of ways life insurance can be designed to help with these concerns.

Did you know that life insurance can be used as a supplemental retirement income? It could even help with chronic illness or long term care expenses during those retirement years. Proper insurance case design and carrier selection are keys to making sure that your clients could enjoy some of the following life insurance tax benefits and other advantages. I will be discussing each in detail in future articles but for now, here is a list of life insurance advantages & tax benefits for you to think about:

  1. Income-tax-free death benefit for beneficiaries.
  2. The policy’s account value potentially grows income-tax-deferred, so no taxes are paid as it grows each year.
  3. Distributions using loans and withdrawals are income-tax-free when structured properly. In addition to the money withdrawn and borrowed from the policy income-tax-free, the residual net death benefits are generally paid to your clients' beneficiaries also income-tax-free.
  4. Could be designed to help with long term care or chronic illness expenses.
  5. No specific IRS annual limitation on premiums paid into a life insurance policy. Once policy is purchased, there will be a maximum amount of premium clients can contribute based on the amount of death benefit they purchased.
  6. No limit on gross income affecting your client's ability to contribute premiums. Unlike Roth-IRA’s, there’s no such thing as “making too much money to contribute.”
  7. Missed premiums may be “made up” at a later time. Note that they shouldn’t skip a premium if it would cause the policy to lapse or to lose any other valuable benefits.
  8. No 10% penalty tax for accessing policy cash values prior to age 59½ when structured properly.
  9. No required minimum distributions (RMDs) for owners - take distributions as needed.
  10. Self-completing upon death (Death benefit exceeds account value).

Please remember that I am not an accountant or an attorney so I am not giving tax or legal advice. My goal is to educate you in matters of insurance. I encourage advisors and clients to seek out professional tax or legal advice when it comes to those matters. That said, you should also know:

Life insurance death benefits are generally tax-free for beneficiaries under IRC 101(a), but may under certain situations be taxable in part or whole. Policy must comply with IRS requirements to qualify as a life insurance contract. Total premiums in the policy cannot exceed funding limitations under IRC 7702.

Withdrawals during the first 15 years of a contract may be treated as income first and includible in policyholder’s income. Distributions will reduce policy values and may reduce benefits. Availability of policy loans and withdrawals depend on multiple factors including but not limited to policy terms and conditions, performance, and fees or expenses.

If the policy is classified as a modified endowment contract (see IRC 7702A), withdrawals or loans are subject to regular income tax and an additional 10% tax penalty may apply if taken prior to age 59 ½.

As I mentioned, I will be discussing these life insurance benefits and advantages that may be useful for your clients' retirement and long term care planning in my future articles so be on the lookout and sign up for Peach Insurance Services' monthly newsletter.

Email me at or call (904) 539-9779 if you have a client that may benefit from any of the above or to simply chat. Talk to you soon!

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