The benefits of life insurance over retirement accounts

Below I will discuss some aspects of permanent life insurance.

• Life insurance protects against uncertain future tax rates. Proceeds from permanent life insurance are not taxed. Unless you convert your retirement accounts to Roth accounts, you will end up paying taxes on the distributions, and future tax rates are likely to be higher than current rates. Depending on the size of your retirement account distributions, you could also face increased taxes on Social Security benefits and even trigger other taxes, such as a 3.8% increase in the tax on net investment income.

If you systematically withdraw funds from your retirement accounts and purchase permanent life insurance, you avoid the uncertainty of future tax rates and the value of life insurance grows tax-free.

• Life insurance is an investment, not an expense. You shouldn’t consider life insurance an expense any more than you would consider investing in a retirement account as an expense. However, investing in permanent life insurance does not involve stock market risk.
• Life insurance gives individuals more control over funds. When Congress wants more taxes on income from retirement accounts, it tends to change regulations in ways that are generally unfavorable to retirement account owners and their beneficiaries. Recent regulations associated with the SECURE Act require beneficiaries to withdraw funds from traditional IRAs more quickly, which translates into higher taxable income for the government. Congress controls when retirement account owners must make required minimum distributions. With life insurance, owners of permanent policies have control over whether they want to terminate life insurance or initiate loans.
• Life insurance incorporates a leverage effect. One bonus dollar can do the work of many, and the result is guaranteed and tax-free. Especially in the event of premature and unexpected death of the insured, life insurance can produce multiples of the initial investment in a retirement account.
• Life insurance mitigates market risk. It is true that during long periods of good stock and bond market performance, retirement accounts can outperform permanent life insurance contracts. But during periods of high inflation, as we have seen recently, both stock markets and bond markets can perform very poorly. Investors who have retired in recent years face an uncertain future, as do their beneficiaries. Investors are now discovering that bull markets don’t last forever, and there’s no guarantee that a traditional 60/40 portfolio of stocks and bonds will always guarantee a financially secure future.

Conclusion: Individuals planning a financially secure future for themselves and their beneficiaries should consider alternatives to a portfolio containing exclusively stocks and bonds. Permanent life insurance should be considered part of retirement planning.

Elliot Raphaelson welcomes your questions and comments at [email protected].