By: Kevin-Barry Henry, #1 Bestselling Author
A permanent life insurance policy is used to accumulate cash on a tax-deferred basis and then, as collateral for a loan or line of credit to provide tax-free cash in retirement.
Tax-Free Cash in retirement is always a precious thing. There is a strategy that can provide a supplemental source of tax-free cash during retirement. The cash can be structured as a lump-sum or series of income-style quarterly or even monthly payments.
A custom-designed, permanent life insurance policy is used, first to accumulate cash on a tax-deferred basis and second, as collateral for a bank loan or line of credit to provide the cash desired, tax-free.
Challenges for high-income earners
Conventional retirement plans limit RRSP/pension contributions. This may reduce the amount of cash needed to provide the income level desired at retirement. Tax liabilities at death and a desire to leave a legacy for heirs and charities also cut into the base needed to support your lifestyle needs in retirement.
Conventional retirement plans limit contributions. This may reduce the amount of cash needed to provide the income level desired at retirement
Conversely, lifestyle needs may reduce or eliminate the capital needed to provide a legacy desired for heirs and charities.
Options to enhance lifestyle
Permanent life insurance can provide the necessary cash to pay the taxes on your investments and assets while creating endowments for charities and legacies for heirs. This leaves most of the accumulated assets at retirement.
A custom-designed, permanent life insurance policy accumulates money on a tax-deferred basis and then is used as collateral for a bank loan or line of credit to provide tax-free cash.
Life insurance owners are a unique and effective retirement planning vehicle too, providing tax-exempt growth of cash today and tax-free access to cash during retirement.
How does it work?
Current tax laws permit the investment and accumulation of cash in a permanent life insurance policy, tax-free up to certain limits. Later, the policy with its cash value is used as collateral for a bank loan or line of credit. The proceeds can be used to buy a vacation property, go on trips or supplement retirement income.
Generally, the loan or line of credit does not have to be repaid until death. Then, the tax-free death benefit pays out the amount outstanding. Any extra money is paid to the named beneficiary.
Starting the Income
The strategy works most efficiently when used as part of an overall retirement income strategy employing the use of other sources of income. This includes setting up the loan later in life after some of the other investments have been used to provide retirement cash flow. Optimal performance relies on a combination of low interest charges on the loan relative to the growth in the policy and relatively short loan duration.
The right type of candidate
The Insured Retirement strategy is best suited to individuals who have maximized their RRSP/pension contributions, minimized their non-deductible debt and are in a high marginal tax bracket. They recognize and value the benefits of permanent insurance protection and want to reduce the amount of tax they are paying on investments. They are interested in supplementing retirement income with tax-free dollars and have a solid credit history.
What is the most tax-effective way to access the accumulated values in a life insurance policy?
A unique way to access accumulated values in an insurance policy without having to pay tax on the withdrawals is to assign the policy values as collateral and obtain a secured line of credit or loan with a financial institution. A bank loan is not determined to be a policy loan because the loan is not being made by the insurer and the loan undergoes normal bank underwriting. Loans can be tailored according to your own needs. The repayment options provide flexibility such as:
- You determine your own repayment schedule
- Interest can be capitalized
- Loan paid out at death
The cash is easily accessible through your Line of credit by cheques, ABM, telephone or internet banking. This gives you flexibility in accessing and using the money as they wish.
The Advantages
- Tax effective access to a new source of retirement money
Like any strategy, it is important to do your homework and find out if it works for you. If you are interested in learning more about this tax-free cash in retirement income strategy, please feel free to reach out and talk about it with me here: FREE 15 MINUTES
As always, I look forward to hearing from you.
With Gratitude,
KB.
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