concept

cash value life insurance

Also known as: cash value life insurance, cash value insurance policy, cash value life insurance policy

Facts (9)

Sources

Why is insurance important in financial planning? | U.S. Bank usbank.com U.S. Bank 9 facts

perspectiveKujala states that cash value life insurance should be considered the 'third leg of the stool' and should be used in combination with other investment tools rather than as the sole risk mitigation strategy.

claimIndividuals in higher income tax brackets who have maxed out qualified retirement plan contributions can use cash value life insurance policies to generate tax-deferred growth.

quoteJacob Kujala, a senior product manager for U.S. Bancorp Advisors, stated regarding cash value life insurance: "It ends up being a de facto tax-free distribution on the back end. It helps with income tax reduction and management while it’s growing, and then potentially when you’re taking money out on the back end as well."

quote“Having cash value life insurance is the third leg of the stool. It can become very beneficial down the road, but only when it’s used in combination with other investment tools.”

claimPolicyholders can withdraw their basis from a cash value life insurance policy without paying tax, and subsequently use policy loans, which are not reportable as income, to achieve a de facto tax-free distribution.

claimOver-funding a $200,000 cash value insurance policy with $10,000 per year can provide a larger immediate payout to heirs ($200,000 death benefit) compared to a traditional investment of the same amount ($20,000) if the policyholder passes away unexpectedly after two years.

claimPolicyholders of cash value life insurance can withdraw their basis without paying taxes because it is considered taking back their own money, and they can subsequently use policy loans which are not reportable as income.

quoteJacob Kujala stated regarding cash value life insurance: "It ends up being a de facto tax-free distribution on the back end. It helps with income tax reduction and management while it’s growing, and then potentially when you’re taking money out on the back end as well."

claimComparing a traditional investment of $10,000 per year for two years versus over-funding a $200,000 cash value insurance policy, the insurance policy provides a $200,000 death benefit to heirs upon death, whereas the traditional investment would only provide the $20,000 invested.