Who are the most susceptible to taxation and investment risk? Retirees and people who are getting ready to retire – people who have the largest IRAs or other tax-deferred savings accounts. Life insurance is probably the most underused strategy to protect large retirement balances from being decimated by the highest levels of taxation. The tax exemption for life insurance is not only the single biggest benefit in the tax code, but it's also the most cost-effective way to protect a large IRA. Life insurance is more valuable than ever before, especially now when rates are low.
Life insurance can eliminate both stock market risk and tax risk, leveraging taxable money to tax-free status as a tax-free retirement fund. It's not only income tax-free, but also can be estate tax-free if set up properly. In addition, there are a lot of non-tax reasons for life insurance: it can provide funds for beneficiaries to convert to a Roth IRA to keep stretch IRAs intact. After inheriting an IRA, a beneficiary often squanders the money. Instead, spending the life insurance benefit would allow the beneficiary to keep the stretch IRA going. It can provide a pension alternative that replaces stock market losses. Tax-free money going to a beneficiary has no restrictions – and that’s why every estate plan should plan for it. Contributions to permanent life insurance are almost unlimited and aside from the tax, estate and retirement planning advantages, life insurance protects families by avoiding government meddling in the event of an early death.
