Ask Terry Questions Tax Free Income from Permanent Life ins. policies

Tax Free Income from Permanent Life ins. policies

By Terry Savage on January 26, 2014 | Insurance & Annuities

A CPA on public television often tells viewers on retirement savings to invest in life ins products, so that when you retire one can receive tax free income from these policies. I don’t get it. Is this possible?

Terry Says:  Yes, you can borrow cash out of a life insurance policy tax-free.  But it will reduce the death benefit.  And along the way, all the years you hold the policy, you’re paying “mortality” charges every year to cover the cost of the actual life insurance.  Plus, you will be restricted to the low interest rate the policy pays along the way.  Or, in the case of “variable universal” life policies, you will be restricted to investment accounts within the policy, but those accounts typically charge high fees!

You would likely be better off from an investment point of view to use a Roth IRA (where all withdrawals come out tax free, but you must qualify to contribute based on income) or even a traditional IRA, where withdrawals are subject to the then-current interest rates.  At least with these two products you can open an account at Fidelity, or Vanguard, or T. Rowe Price and get the lowest annual fees and costs.  Those can really add up over time.

If you do need life insurance, you can either buy simple term (which will run out at some point!) or a low-cost traditional cash value life policy.

What these investment advisors know is that you are less likely to stop making payments on life insurance than you are to stop paying into an IRA when times get tough.  That’s my generous appraisal of their reason for recommending the use of life insurance policies as a main savings vehicle.  If I were being cynical, I would point out that insurance agents get HUGE commissions on life insurance policies!



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