No Roth, No Problem

Having too much income will prevent you from using a Roth IRA (Roth) to save after-tax money, and grow that money, tax-deferred, as well as use that growth, tax-free. Also, the type of income you have may prevent you from using a Roth, as contributions must be made with earned income, not income derived from dividends and other passive sources.  On top of all of this, the people who are most likely to want to maximize Roth IRA contributions, and may even use strategies like the “back-door Roth”, are likely able, and want to, make substantially higher contributions than allowed by law anyway.  For these folks, who want to enjoy tax-free growth and tax-free use of gains, well into the future, municipal bonds, don’t fill the bill; instead, the only mechanism left is the implementation of a properly designed cash-value life insurance plan. 

Cash-value life insurance has several tax advantages that can mimic a Roth IRA, except without income or contribution “limits” imposed on a Roth IRA (such as income phase-out, earned income requirement, and annual contribution limits). But selecting the correct type of permanent cash-value policy must be done with care for a variety of reasons. Firstly, there is not one type of cash-value insurance that is better than another type, each general type has a unique value proposition.  Also, the individual contract terms, carrier formation, carrier ratings, dividend history, underwriting standards, reserves, optional features and benefits, and other factors of each issuing insurance company’s contract, may play a part in your decision to use one type of insurance over another, with one particular carrier over another.  Said another way, the same type of insurance still differs from one carrier to another!

Complexities of cash-value life insurance should be explained by an experienced, licensed professional

Using permanent cash-value insurance for this purpose should be secondary, the primary purpose of the policy is to provide life insurance and it offers a panoply of benefits above and beyond tax benefits to the cash-value. 

A full understanding of:

  • cash-value crediting method
  • dividends
  • loan interest
  • direct or non-direct recognition
  • general account surpluses/obligations
  • carrier ratings
  • performance history

…along with several other items, need to be understood for all products being considered by the policy purchaser; also reviewing illustrations that can generally show the guaranteed and non-guaranteed aspects/projections of a certain type of policy. That being the case, it is most prudent to speak to an experienced, knowledgeable professional since the choice made, will have to be lived with for years into the future.

Filling the hole in a portfolio

Using permanent cash-value insurance can fill a significant hole in many people’s portfolio.  Typically, brokers advise clients on investments based on the client’s time horizon for needing to use the money, and risk tolerance.  Younger investors who want to be aggressive in their investing, may not have any “safe” money sitting on the sidelines, growing at a slower, but more stable pace, and this might prevent them from taking advantage of buying opportunities when the market has a correction, but the only significant money they have, might be tied up in securities that have lost value during the correction.  But as investors get older, many are advised to put an increasing percentage of their portfolio into bonds, or other fixed income instruments, but this issue here to is still that an investor would still have to liquidate securities to have the cash to take advantage of buying opportunities

Another issue is that sometimes an investment doesn’t allow for liquidating only certain portions, like just the bond portion, of the investment.  This might limit the down-side of the portfolio, but it can also inhibit the upside.  But certain types of cash-value life insurance can serve as the conservative aspect of a well-rounded portfolio, by leveraging the typically long-term stability of a highly rated insurance company’s general account.  Since access to the cash-value can be done without taxation, or penalty,  it gives the policy holder liquidity that is difficult to achieve with regular investments, and when the tax load is considered, it makes the tax free use of an insurance policies cash-value, all the more attractive.