For those who want the protection of a life insurance policy and don't mind paying extra for the added benefit of potentially being able to earn cash-value growth on their premium dollars, the dual nature of a variable universal life (VUL) insurance policy may be a good choice. In many cases, a VUL can serve as a resource for retirement and tax planning with its market-based cash value growth potential and tax advantages.
Here are some of the retirement and tax advantages that come with variable
1. Tax-deferred growth for retirement planning
With a VUL, the returns earned on any cash-value are tax-free. Moreover, there are no minimum required distributions or MRDs (as with some qualified retirement plans) value in your VUL to grow tax-deferred until you need it.
2. Tax-free* policy loans
Cash-value that you may have in your VUL can be taken out by way of a policy loan. That's money you can borrow tax-free. However, any policy loans that are not repaid, can reduce your death benefit.
3. You don't qualify for a Roth IRA
Roth IRAs can be a great way to save for retirement. However, if you're in a high-income tax bracket, you may not qualify for a Roth. The Internal Revenue Service has a set of rules to qualify individuals who can contribute to a Roth IRA. One set of rules pertains to income limits. If your income exceeds a certain amount, you will not be allowed to contribute to a Roth IRA. With a VUL, individuals in high-income brackets can allow any cash-value growth to build over time, similar to after-tax contributions to a Roth IRA. It should be noted that a VUL policy is more complex than many other forms of life insurance and should be monitored closely throughout the life of the policy. Also, VUL is typically subject to surrender charges for a period of up to 15 years (more or less depending on the carrier) which can be very high in the early years of the policy.
For more information on life insurance and retirement planning, visit the Protective Learning Center.
* Loans outstanding at policy lapse or surrender before the insured's death will cause immediate taxation to the extent of gain in the policy.