For many individuals, a life insurance policy comes down to the death benefits paid out after the policy owner passes away. While this is certainly something to think about, there are also other options with whole or universal life insurance policies, such as using the proceeds as retirement income. The technical term for this sort of transaction is a life insurance retirement plan (LIRP), or a more common term is simply an over funded life insurance policy.
How About funded Insurance Works
How a policy becomes over funded is if the premiums paid in the first 10 years of the insurance policy exceed the minimum monthly premiums. This excess money is then put back into the life insurance policy and, at a later date, this money can be taken out of the policy as tax-free income. However, there are a few things to conside before a person uses whole or universal Life Insurance in Austin TX as a retirement income plan.
Who Uses this Retirement Savings Plan
Over funded life insurance isn’t uncommon, but it is typically for wealthier individuals that have already maximized their tax-deferred investment quotients. While there are people who aren’t overly wealthy that choose this type of retirement planning, these types of individuals will need to proceed with caution.
While it is true that loans or withdrawals from an over funded policy don’t have any fees or any tax implications, there is a chance that through the mishandling of the LIRP that withdrawing or borrowing against a life insurance policy could become taxable.
Proceed with Caution
A modified endowment contract (MEC) is what a life insurance retirement plan can morph into if the policy is over funded incorrectly. MEC is the designation given for a life insurance policy where premium payments have exceeded federal limits. Knowing what those limits are and making sure that the extra money paid to over fund the life insurance doesn’t exceed these limits can avoid triggering a 10% tax on any withdrawals from the insurance policy before the age of 59.
There are other things to consider such as allowing an insurance policy to lapse, or defaulting on a loan from a life insurance policy. However, if you like the idea of tax-free income provided by over funded Life Insurance in Austin TX, you may want to speak with an insurance expert. By speaking with the Perdue Insurance Group, all your questions about over funded life insurance policies can be adequately answered.