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Safeguard Your Retirement with a Whole Life Insurance Policy

By Dory Rodriguez on January 17th, 2010

Whole life insurance can be one of the most attractive financial products you can consider.

You may know of friends or family members that have suffered market losses in their investment portfolios over the past few years, which got them to rethink their investment strategies. In today's economic environment, people are looking for ways to safeguard a percentage of their assets from a future market downturn. This may become particularly important when you consider retirement.

Whole life insurance enjoys many tax benefits that make it an attractive asset to add to your overall investment plan, and receives favorable tax treatment under the law. Section 101 of the Internal Revenue Code provides that the proceeds of a life insurance policy maturing as a death claim, subject to the exceptions stated in the law, are not subject to income tax when paid.

Tax Benefits of Whole Life Insurance

  • A life insurance policy owned individually pays a death benefit claim tax-free to beneficiaries
  • The cash value in the policy grows tax-deferred
  • Withdrawals and loans are tax-free provided that the policy remains in-force. If the policy is surrendered, the gain in excess of the cost-basis is taxable

How Whole Life Insurance Works

Whole life insurance has an annual premium payment that is based on keeping the death benefit in force to age 100 or 120. The policy has a guaranteed annual interest credited to the cash value, and the insurance company can also pay dividends, which are not guaranteed but act to increase your cash value and death benefit if you choose.

For example, a healthy, 39 year old male with a $1,000,000 death benefit might have a whole life annual premium of about $13,000. The guaranteed annual cash value growth, estimated at 6%, may grow to $389,831 at age 65, and the non-guaranteed cash value might grow to $678,478. You can request a quote to see what the exact numbers might look like for you, remembering of course that your health, age, and other factors play a role in the final figures.

Additional advantages of using whole life insurance as a part of your investment strategy include:

  • Cash value grows at a fixed rate, and can be improved by company dividend payments (the non-guaranteed cash value)
  • The cash value is creditor protected in many states

You want to make sure that your policy doesn't become a Modified Endowment Contract (MEC). The major drawback to a MEC is a 10% federal penalty for early withdrawal prior to age 59 ½, and the fact that distributions are taxed as earnings. Your life insurance agent may be able to help you know what would or wouldn't be classified as a MEC.

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