If set up properly, life insurance can set you up with a lifetime of tax-free income to a level that will out-perform any alternative assets out there, says Denver Nowicz, retirement planner with Wealth For Life in Scottsdale, Arizona.
Choosing the right policy is critical and Nowicz uses Index Universal Life. Within those policies, the insurance companies will use a variety of market indexes, such as the S & P 500, Nasdaq and Dow Jones.
Any of the gains credited in that policy over a 12-month period become permanent and locked in. The ability to lock in gains when you get them, a floor to protect you from losses and then resetting to capture market rebounds, gives you very high, steady, long-term yields in the 7-9% range, says Nowicz. Doing it on a tax-free basis, adds Nowicz, is a pretty big advantage.
The downside are the costs one has to pay going into the policy. All policies have a state and federal tax with a range of 5-8%, the cost of insurance and the expense charges. Nowicz says these costs will be higher in the first 10 years of the policy and then drop about 80% after year 11 for the life of the policy. Nowicz notes that it actually turns out to be 60-80% less in overall costs compared to a typical asset-based fee model.