#2 – Lowering Taxes
When it comes to growing, and spending, money, taxes can have a major impact.
Not only is this a major impact on our financial portfolio when our money is growing, this can have an even greater impact when we retire.
Taxes and Growth
There are two ways to tax the growth on your money. Immediately—when you earn it—and deferred—when you take it out of your deferred account.
With life insurance we pay taxes on our money before we invest it, and then—if we plan correctly—we pay no taxes on the growth.
The question becomes: “Is deferring taxes better than paying taxes now.”
The reality is, deferring taxes is a roll of the dice.
Deferring is just postponing. So, there are some things we have to take into account.
The first is, retirement, which we will cover in just a second. But when we retire how much tax will we have to pay?
The second is tax rates, and this is where things become unclear.
Are taxes going to go up or down in the future?
Will tax brackets change in the future?
What tax bracket will I be in when I retire?
These are all very good questions, and probably hard to answer. However, the general opinion of almost everyone is that taxes will not go down.
This means, you will be lucky if taxes do not change from now until you retire.
There is a risk that taxes could go up before you retire. If this happens then you lose money because of that risk.
Sure, in a 401k situation there is a match we have to take into account. Saving up to the match can make sense for many individuals. However, beyond the match may not be a benefit.
If taxes go up, or tax brackets change, you may end up paying more tax than you expected.
By paying taxes now we eliminate these risks.
Taxes and Retirement
The second part of taxation is when you retire.
We have interviewed multiple accountants on this subject and the reality is this: almost no one is in a lower tax bracket when they retire than when they were working.
This means that, no matter what we originally thought about retirement, most people are retiring and paying more taxes than they originally planned.
Here are a few reasons.
1: Children – After the kids grow up those deductions go away. Many of the deductions you had while you were working are no longer available to you. This means, more taxes.
2: Home Mortgage – Similar to deductions for children, many are paying less, if any, home mortgage interest. This means even fewer tax deductions.
3: Still making money – Many individuals assume when they retire they will stop making money. However, in today’s economy many individuals find they are still working in some fashion—this means more income and higher tax brackets.
Deferring taxes isn’t always a bad idea, however, know what you are getting yourself into. Cash value life insurance offers us a way to pay taxes now and then never pay on the growth.
And, as icing on the cake, when we use our life insurance cash value as income for retirement, we do not actually take it as income. This means that we reduce our actual retirement income which can reduce our taxes on earnings, taxes on social security, and potentially help reduce our tax bracket in a much more valuable way.
The last form of taxation comes when we die. With whole life insurance we get the benefit of having our money, in the form of life insurance death benefit, transferred to our heirs income tax free.
This is what we mean by deferring taxes indefinitely. With whole life insurance our money grows tax-deferred. However, when we die our life insurance death benefit (which has our cash value included in it) transfers income tax free.
This means that as long as our life insurance policy is not cancelled we will never pay income tax on any of the earnings in our account…ever.
We leave a legacy for our family in a safe and effective way.
#3 – Having Access to Our Money
The last investment characteristic we need is liquidity. Whether it’s for emergencies or opportunities, liquidity gives us control over our money when we want it—no matter what we want it for.
With 401k’s and IRA’s we are forced to lock our money away where we cannot access it. This can be a huge problem.
And because of this problem we are forced to have a side fund, like an emergency savings fund, that earns little to no interest.
These problems go hand in hand.
Government Sponsored Plans
401k’s and IRA’s are among the government sponsored plans where our money is locked away.
Here is a quick story.
When the 2008 crash happened one of my clients had decided to save money into his life insurance policy instead of in his 401k. Of course this was after careful study and understanding of what he was doing.
When the 2008 housing market came tumbling down, my client, had capital available in his policy that he could access anytime.
The housing crash was a horrible thing and many people suffered. However, he was able to take advantage of this situation responsibly and he purchased a few homes at rock bottom prices.
He has made a significant amount of money off of those investments.
You don’t have to be an investor. However, having liquidity, or access to your money, gives you the opportunity to do what you want when you want.
If my client had put his money in an IRA or 401k he may not have had the same options.
This same principle plays into emergency savings. If your emergency savings is locked into an IRA or 401k you may not be able to access that money.
On the other hand, if that money is in a bank account or money market account it will probably earn less that 1%.
Life insurance offers us a way to marry the two ideas. We can place our emergency savings somewhere safe and accessible, while still having the growth potential of an investment vehicle.
This makes life insurance a very smart place to put our emergency savings fund.
The point is, having access to your money is a massive benefit that gives you the options to do what you want today, while also giving you the freedom for whatever may come your way tomorrow.