When it comes to retirement planning, most people have heard of traditional vehicles such as 401(k) and Roth IRA retirement accounts. However, a lesser-known option that has been popular among high-net-worth individuals is the cash value life insurance policy, also known as the "Rich Man's Roth."
A cash value life insurance policy is a life insurance contract that has a cash balance that can be accessed anytime you choose. Whole Life Insurance Policies earn a guaranteed rate of return regardless of marketing fluctuations. An Index Universal Life (IUL) program follows the performance of the market, however, unlike a 401(k) you cannot lose value as the bottom is 0%.
If you read our article about Other People’s Money (OPM), that strategy uses a cash value life insurance that's coupled with outside money to fund your life insurance contract. Read the article here
Unlike traditional retirement accounts, cash value life insurance policies offer a range of benefits that can make them an attractive option for those looking to save for retirement while minimizing their tax burden. Some of the key advantages of a cash value life insurance policy include:
Tax-Free Income: One of the most significant advantages of a cash value life insurance policy is that all income is tax-free. Individuals can access their savings without worrying about paying taxes on their withdrawals.
No Early Withdrawal Penalties: Unlike 401(k) and IRA retirement accounts that have a 10% penalty to withdraw before 59 1/2 years old, there are no early withdrawal penalties for taking funds out of a cash value life insurance policy. This means that individuals can access their savings whenever they need them, without worrying about fees.
No Contribution Limits: With traditional retirement accounts, there are strict contribution limits that can prevent individuals from saving as much as they would like for retirement. As of 2023, 401(k)'s are limited to $22,500 per year, and IRA's (including Roth) are limited to $6,500 - this is one reason why a cash value life insurance policy is coined a rich man's roth. Cash value life insurance policies have no contribution limits, allowing you to contribute as much as you want in a tax-advantaged way.
No Income Limits: Roth IRAs are popular as they allow for tax-free growth and distributions. However, there are strict income limits of $138,000 that can prevent people from contributing to these accounts. Cash value life insurance policies have no such limits, making them an attractive option for those with high incomes.
Tax-Free Death Benefit: In addition to the benefits of tax-free growth and distributions, cash value life insurance policies also include a tax-free death benefit for heirs. This means that individuals can leave a significant amount of tax-free money to their loved ones, providing financial security for generations to come.