Once retired, you’ll also be drawing non-discretionary income from Social Security and taking required distributions from taxable retirement funds. As income from Social Security fills your lower income tax brackets, you can better minimize taxes by drawing income that you need from the cash value in your life insurance policy, generally tax-free. However, this will also lower the amount of the life insurance benefit once the policy owner dies.
If you have a substantial income such as interest, dividends, and other taxable income that must be reported on your tax return in addition to your Social Security benefits, you’ll be subject to federal income taxes on 85% of your benefits. The fact is, most all taxable income, including tax-free municipal bond interest, is taken into account when determining just how much of your Social Security benefits the IRS will take. With permanent life insurance, the assets inside your policy won’t increase the tax on your Social Security income.
Section 7702 of the U.S. IRS tax code was created to differentiate between life insurance policies and investment vehicles imitating life insurance contracts. The section’s objective is to ensure that only legitimate life insurance policies receive tax-advantaged treatment. Simply stated, it is used to determine whether a life insurance contract qualifies for tax benefits and how proceeds are taxed. Proceeds of policies that don’t meet the government’s definition of a true life insurance policy will be considered taxable as ordinary income and subject to annual taxation – whether you withdraw money from your policy or not.
Recently, the https://installmentloansgroup.com/payday-loans-ks/ economy’s low-interest environment has prompted positive changes to Section 7702, allowing consumers to put even more money into a permanent life insurance policy. For those using permanent life insurance as an asset-building strategy for the future, Section 7702 allows them to effectively transform policies into retirement vehicles, in addition to, and sometimes instead of, an income-replacement vehicle. For high-net-worth individuals who aren’t as concerned with the death benefit provided by a life insurance policy, having the ability to put more money into these types of contracts provides greater access to the tax-advantaged cash value within the policy.
Life insurance can be a valuable asset in the building, protecting and transferring of wealth as part of your overall wealth management strategy. If you’re considering how permanent life insurance fits in your financial portfolio as a tool for meeting your wealth management goals and objectives, your relationship manager † is here to help.
At The Private Bank, we believe that managing wealth goes beyond providing financial services. It’s about helping our clients focus on living more fulfilling lives by contributing ideas and innovation that can make it possible for them to achieve their financial goals.
There’s no denying that the high costs of long-term care can wipe out savings set aside for things such as retirement, not to mention becoming a financial burden on loved ones who must cover the costs of care. By providing coverage, when needed, and a death benefit, a hybrid life policy and an LTCI policy can be an asset in protecting wealth.
In retirement, you’ll draw income from a number of investment accounts that are either fully or partially taxed. A mix of permanent life insurance, along with other investment accounts, allows you to take tax-free loans from the cash value in your policy to help supplement your income, preserving assets and minimizing taxes. However, this will also lower the amount of the life insurance benefit once the policy owner dies.