Life insurance can be a tough sell for advisors with clients who see it as an expense rather than an investment, and one that won’t even kick in until after they’re dead and gone anyway. What if they could use it in their tax planning, though?
Kevin Kimbrough, principal of national sales at Saybrus Partners, suggested ways advisors can use life insurance to secure tax-free income for their clients in retirement.
Life insurance can be used both in the accumulation phase and the distribution phase, Kimbrough told ThinkAdvisor. With younger clients who are still accumulating assets, he said advisors often use either variable or index policies.
“Frequently, we see advisors using the variable policy, similar to variable annuities, or an index policy, again similar to an index annuity, as an accumulation vehicle where clients have a need for life insurance,” Kimbrough explained. “[They purchase it] for that need, but they’re able to use the policy as an accumulation vehicle, putting in additional dollars over and above the premiums required to support life insurance, and those additional dollars go into subaccounts or into the index accounts, depending on the type of policy.”
Those dollars grow tax-deferred, just like an annuity, Kimbrough said, but “unlike the annuity, you’re able to take your basis out first and that comes out tax free. When you get into the gains, you’re able to switch over and start taking policy loans against the income-tax-free death benefit.”
He acknowledged that there are additional costs associated with using life insurance this way, but “those are offset substantially compared to the taxation you’d have had because you’d been able to take the loan against that tax-free death benefit. As long as that policy stays in force until the insured passes away, then the death benefit is paid out and the loans are repaid against that, they’ll be able to enjoy tax-free retirement distribution.”