If you need life insurance, one strategy you might consider is to do your investing inside a variable life insurance policy. With such insurance, your premiums are invested in mutual fund look-alikes. You won’t have to pay current income taxes on any investment earnings.
Additional tax benefits may be available:
* While you’re alive, you can take policy loans and withdrawals. If handled carefully, these distributions can provide an ongoing stream of tax-free cash flow.
* At your death, your beneficiaries will receive insurance proceeds that exceed the policy’s cash value. Typically, these proceeds will be free of income tax.
Be careful not to withdraw or borrow too heavily. If you do, the policy will lapse and you’ll owe the deferred income tax. Ask your insurer for help with avoiding policy lapses.
Generally, you’ll have to hold onto a variable life policy for a period of years before the tax benefits offset the upfront costs. Nevertheless, if you have a need for life insurance these policies can meet that need while providing access to tax-free investment income.