Utilizing Life Insurance for Tax Efficiency

At a recent event hosted by the National Association of Insurance and Financial Advisors Apex East, Rob Petzold, regional vice president at Kansas City Life, emphasized the importance of addressing taxes in financial planning. Surprisingly, three-quarters of affluent clients admitted to not discussing tax strategies with their financial professionals.

Petzold, along with Chris Bor, another regional vice president at Kansas City Life, shared insights on achieving tax avoidance for clients. Petzold urged financial advisors to prioritize tax avoidance and inquire about the steps clients have taken in this regard. While common responses often involve 401(k) accounts, individual retirement accounts, or long-term capital gains investments, Petzold highlighted the drawback of these as “tax-me-later investments.” He emphasized that true tax avoidance means aiming for “tax me never.”

According to Petzold, two effective avenues for “tax me never” are Roth IRAs and life insurance. He particularly praised life insurance as an excellent tool for achieving tax avoidance.

Bor expanded on this perspective, suggesting that advisors can help clients navigate potential “tax bombs” in 401(k)s and IRAs through the strategic use of life insurance. He specifically mentioned indexed universal life insurance (IUL) as a means to provide supplemental income during retirement, presenting it as a viable alternative to Roth IRAs.

Bor and Petzold outlined 15 reasons why IUL is a compelling option for retirement income. These include cash accumulation for supplemental retirement income, tax-deferred growth with no tax implications on appreciation, and tax-free access to cash accumulation through withdrawals and loans. They also emphasized the absence of mandatory distributions, protection against market loss, and living benefits that can be accessed during one’s lifetime.

Furthermore, Bor highlighted the unique advantage of cash value life insurance, which provides an immediate tax-free step up at death, making it a valuable asset in financial planning. He noted that IUL offers protection from creditors, continued policy funding if disabled, and a tax-free death benefit for heirs, avoiding probate.

In summary, life insurance, especially in the form of indexed universal life insurance, emerges as a powerful tool for financial advisors to guide their clients towards effective tax avoidance and secure retirement planning.