Cash value life insurance can double as a retirement plan. Suppose you buy a variable life insurance policy with a $250,000 death benefit, agreeing to pay $5,000 per year in premiums. Over the next 20 years, you’d pay $100,000 in premiums.
Assuming the investment accounts earn 10% per year, before expenses, your cash value will be in excess of $200,000. Then you can withdraw about $17,000 from the cash value, tax-free, each year. This can go on for six years, until you have withdrawn the $100,000 you’ve paid in premiums. Then you can borrow $17,000 per year. All the while, the policy will remain in force.
However, suppose you withdraw and borrow $20,000 per year instead of $17,000. Using the same assumptions, the policy will lapse when you’re 85. Taking larger amounts from the policy will cause a lapse even sooner.
If you’re interested in this approach, work with a knowledgeable insurance agent and request “in-force re-projections” every few years. That will help you to avoid a policy lapse, which would trigger all the unpaid income tax.
