FIUL and the Importance of Tax Diversification

With the cloudy view of the future tax environment, now may be a good time to reevaluate your client’s tax strategy. Taxes can have a significant impact on how much of your client’s savings they can access in the future and the amount they can pass on to their beneficiaries. That’s why it is so important to also consider tax diversification as part of their retirement strategy. Tax diversification involves placing assets in a variety of financial vehicles that have different taxation structures. FIUL can help achieve this goal through a combination of three distinct tax advantages: tax-deferred cash value accumulation, income-tax-free loans and withdrawals,¹ and the typically income-tax-free death benefit.

It’s important for clients to understand that life insurance does not have the same restrictions as other financial vehicles, making it a powerful asset as clients look to build their retirement security. Life insurance has no penalties for accessing cash value prior to age 59½, assuming the policy is not a modified endowment contract. Accessing any available cash value through policy loans and withdrawals1currently does not have an effect on your client’s Social Security income. And last but not least, there are no required minimum distributions at age 70½.²

Between qualified plans/traditional IRAs, Roth IRAs/Roth 401(k)s, individually owned mutual funds, municipal bonds, and nonqualified deferred annuities, there are many tax advantages to consider with the various financial vehicles available to help Americans build and maintain their financial assets – but life insurance should also be a part of this discussion to effectively ensure your client is managing how much and when they are being taxed.

1 Policy loans and withdrawals will reduce the available cash value and death benefit and may cause the policy to lapse, or affect guarantees against lapse. Withdrawals in excess of premiums paid will be subject to ordinary income tax. Additional premium payments may be required to keep the policy in force. In the event of lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. If a policy is a modified endowment contract (MEC), policy loans and withdrawals will be taxable as ordinary income to the extend there are earnings in the policy. If any of these features are exercised prior to age 59½ on a MEC, a 10% federal additional tax may be imposed. Tax laws are subject to change and you should consult a tax professional.

2 Life insurance does not provide a stream of income in retirement. Any potential supplemental income is available through policy loans and withdrawals.