Cash Value Life is a Hedge Against Higher Taxes

I’m not an alarmist when it comes to what may happen with income taxes in the future, but as the US Government debt mounts, it’s definitely giving me cause for concern.

The primary tools used by many consumers to save for retirement are IRAs (Individual Retirement Accounts) and 401(k)/pension plans.

IRAs and 401(k) plans are “tax-deferred*.”

Advantages of tax-deferring income?

-Reduce current income taxes
-Tax-deferred growth (more money growing in a tax-deferred environment)

Disadvantages of tax-deferring income?

ALL of the money when it comes out is income-taxed
-Have to wait until age 59.5 to remove the money (at least to avoid a 10% penalty)
-We have no idea what the income tax rates are going to be when the money is removed

It’s the last item that is the focus of this newsletter. Income tax rates are historically low. Let me remind you of our past top marginal income tax rates.

2020       37%
1988       28%
1986       50%
1980       70%

The most recent low-income tax brackets were when we had Republican presidents and the higher tax brackets are with Democratic presidents.

National Debt

Our current national debt is over $26 trillion. That debt has doubled in the last 10 years. With COVID-19 debt piling on, there doesn’t appear to be any way to stop the growth.

Paying the piper

At some point in time, the government is going to have to tackle the debt crisis. The way the government typically deals with such a crisis (at least when Democrats are in charge) is to raise taxes.  It’s scary to think about where income taxes may go in the future.

Cash value life Insurance as a hedge against higher taxes

Many people are unaware of the benefits of growing cash in a life insurance policy. While not all policies are created equally, the following are the characteristics of a “good” cash value life policy:

1) Money grows tax-free.

2) Money can be removed tax-free.

3) Gains can be pegged to a measuring stock market index.

4) Gains are locked in annually and can’t be lost due to downturns in the stock market.

All four aspects of a good cash value life policy are attractive, but the two to focus on for this newsletter are 1) and 2). Money can grow tax-free and be removed tax-free

Tax-defer to a 401(k) or fund cash value life in a non-deductible manner?

This is the question. Is it better to tax-defer money into an IRA or 401(k) plan where the money can grow tax-deferred but when it comes out it will be ALL taxed at your future tax bracket?

The fear is that our future tax brackets may be higher or much higher than where they are today.

When growing wealth in a cash-value life policy, it doesn’t matter what your future tax bracket is going to be because the money can come out of the policy tax-free.

The point of this newsletter isn’t to suggest that all your money should go into a cash-value life insurance policy. It’s to make readers think about using cash value life insurance as one part of a retirement planning strategy and one that will be a great hedge against income taxes going up in the future.

If you would like more information about using cash-value life insurance as a retirement planning tool, please send me an email or feel free to give me a call.

*If you earn more than $75,000 (single) or $124,000 (married) you can’t take a deduction when funding an IRA.