How to leverage life insurance to maximize retirement savings

For high earners who have already maxed out their 401(k)s and IRAs, there is another vehicle for them to consider in growing their retirement savings: life insurance.

“Assuming you are working with an adviser who knows what they are doing, life insurance cash value grows tax deferred, and then the cash value may be accessed tax free if done properly,” says Craig Berson, President and CEO of Berson-Sokol Agency Inc. “And when the policyholder dies, the death benefit is distributed to the policy beneficiaries tax free.”

Smart Business spoke with Berson about how life insurance can be a powerful and tax-advantaged part of a retirement savings plan.

Why might life insurance get overlooked in retirement planning?

Many who are planning the financial aspect of their retirement don’t fully understand the tax-favored treatment of life insurance. They also tend not to understand that the cash value can grow and be distributed tax free if designed properly. With many other financial vehicles, contributions can possibly be tax deductible and grow tax deferred, but the distributions are typically taxable. That’s does not have to be the case with life insurance.

The obvious advantage of incorporating life insurance into retirement planning is the tax-favored treatment — tax-deferred growth, tax-free distribution through the use of zero-cost policy loans and a tax-free death benefit.

How does life insurance compare to other retirement savings vehicles?

With many financial vehicles, there are annual contribution maximums. Depending on how it is structured, life insurance can allow for much higher contributions. A very high earner could put $100,000 or more each year into life insurance. In designing a retirement-focused life insurance policy, it is critical to properly structure the cash-value-to-death-benefit ratio in order to keep the tax advantaged benefits.

Life insurance can be used to supplement other financial vehicles and is also a product that can be used to insulate a person’s savings from market swings. And the younger the person is when they start a life insurance policy, the better. By continuing to make regular premium payments and letting it sit, in a few decades the policyholder or their beneficiaries are potentially going to get a lot of tax-free bang for their buck.

Who can help leverage life insurance for retirement?

While the policyholder can make tax-free distributions and the death benefit is tax free to the beneficiary, there are certain rules that, if they are broken, could cause the policy to lose its tax-advantaged status. That’s why it is critical to work with an insurance broker who is knowledgeable about this concept.

Some companies have specific products designed for this type of planning. And like with anything else, some carriers are just more competitive in this market than others. It’s best to work with a broker or adviser who represents a number of carriers, someone who really understands the ins and outs of life insurance planning.

Also, when thinking about funding retirement with life insurance, it’s important not to create a plan in a vacuum. Instead, work with an adviser or broker who knows what is being contributed by the policyholder to a 401(k) plan and IRAs, and who knows the other investment vehicles used or that are being considered, as well as the policyholder’s risk tolerance. The adviser should also be aware of any other advisers involved in the retirement planning because the better coordinated they can be, the better job they’ll do for the policyholder. 

INSIGHTS Insurance is brought to you by Berson-Sokol Agency Inc.

Craig Berson

President and CEO


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Brokers, connect with Craig to discuss how life insurance can fit into your clients’ retirement savings plan.