Typically, you'll pay life insurance premiums periodically, which is a form of dollar-cost averaging into the account. Image: small smiles/Shutterstock.com
By: FEDweek StaffWith variable life insurance, a form of permanent (cash value) life insurance, you allocate your premium payments among subaccounts that resemble mutual funds. You enjoy tax-free buildup even if you move money from one subaccount to another.
Typically, you’ll pay life insurance premiums periodically, which is a form of dollar-cost averaging into the account. There may be many subaccounts to choose among, for example various type of stock accounts and bond accounts. When choosing among them, consider your time frame and the balance of your other investments.
If you enjoy strong sub-account performance you can maintain the same premium payments and see your cash value as well as the policy’s death benefits rise. Alternatively, you could trim premium payments in the future yet still sustain the same amount insurance coverage. Thus, variable life insurance permits you to capitalize on growth. In addition, you’ll enjoy all the tax benefits of permanent life insurance:
There’s no income tax on investment income inside the policy. You can access a portion of your cash value without owing income tax. When you want the money in your policy’s cash value you can take tax-free withdrawals until you reach the amount of the money you’ve paid in premiums. After that point, you can take tax-free policy loans.
There will be a substantial payout to your beneficiary after your death, free of income tax.
The bottom line is that variable life insurance can provide tax-free retirement income to you as long as you manage the policy carefully, plus an income tax-free death benefit to your loved ones.
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