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7 Reasons Small Business Owners Should Consider Life Insurance vs. Traditional Retirement Plans

Life Insurance

life insurance policy

Did you know 34% of small business owners do not have a retirement plan? And, those that do are relying solely on a 401(k) or IRA, which are heavily taxed and laden with restrictions. Whether you’re self-employed or a small-business owner, there is a better way to plan for your future, and it may not be what you think.

The traditional retirement strategy for small business owners is to save money during their productive years to provide for their needs later in life when their earning ability is exhausted. Not only income but healthcare. One method is to utilize business disability insurance, but that is very expensive and only pays a monthly amount within a limited time. Plus, disability insurance can get very expensive and may be taxable.

While these approaches can work, we have another, more lucrative solution. But first, let’s explore why more and more business owners are realizing how flawed these traditional retirement plans are.

Traditional Retirement Plans

Conventional wisdom teaches to contribute to your 401(k) to stockpile a sizable nest egg that will take care of you during your retirement years. This can work great for employees where the employer matches the contribution. Free money is always a good thing. But you’re a business owner— who’s matching your contribution? Nobody’s offering you free money.

And that’s just the beginning. Traditional plans come with a list of other challenges you might want to be aware of.

First, the money you put into your retirement plan is ‘locked in’; meaning, until you reach retirement age (59½), you do not have access to that money without paying a hefty penalty. When Uncle Sam is involved, you can bet he will always find a way to get his “fair share.” What if you want to retire before age 59½? 

Your contribution is capped (currently at $19,500 per year if you’re under age 50). What if you have a good year and want to contribute more?

By the time you retire, most of your key deductions have often disappeared (mortgage & kids) bumping you into a higher tax bracket, not lower. This means the money in your retirement account has less buying power because it’s taxed at a higher rate. Uncle Sam wins again.

Depending on your state, earnings may also be subject to state and local tax. So when you take out distributions, not only will you have to pay federal tax, but in some states, you will have to pay a second layer of tax as well!

Lastly, you’re losing your money in two key ways: ongoing management fees that can average 1% – 3% a year and taxes on ALL money you take out. For some, that can mean paying the government up to 60% of your nest egg!

All of these limitations can be eliminated by taking a different approach to providing for your future.

The solution? Max-funded Indexed Universal Life Insurance

Indexed Universal Life policies are an affordable, flexible, and tax-advantaged way to not only protect your family but also to plan for retirement in one of the most cost-effective ways out there. They pack a multi-fauceted punch. Here are seven reasons why a max-funded indexed universal life policy makes sense for so many small business owners and entrepreneurs:

  1. Tax-free income for the rest of your life

The interest and dividends that accumulate inside the policy, and the death benefit if you pass away while your policy is in force, are not subject to income taxes. Plus, withdrawals of accumulated cash value do not apply for early withdrawal penalties.

  1. Liquidity along the way

If you ever need to take a loan from your policy, you can do so for any reason. The interest rate is low, and the maximum amount you can borrow from it is based on your age and life expectancy. Often the interest on your growth outperforms the interest on your loan creating arbitrage. Imagine making interest rather than paying interest on a loan you took out!

  1. Solid, safe, secure growth over

Life insurance delivers consistent growth year after year, even when most investments lose money. Investing in a market index is a safe, predictable way to grow your money.

  1. Guaranteed against loss when the market crashes

Rest assured knowing your portfolio is safe from any type of market crash. An indexed universal life insurance policy is backed by the strength and stability of the largest insurers in the world – companies like Fidelity & Guarantee and Mutual of Omaha.

  1. Flexibility in contributions and distributions

You can contribute as much as you want to an indexed universal life insurance policy, you just have to increase the death benefit to match. Contribute more during more profitable months and less in the off season. Taking money out is just as flexible. Retire whenever you want without a government penalty. 

  1. Protection against illness and disability

If you qualify, your indexed universal life policy can also be a valuable resource should you become diagnosed with a major illness or disability. You can file a claim against your death benefit and qualify to receive tax-free income. Additionally, the cash value can always be used as a substitute for a salary while you’re unable to work.

  1. Huge tax-free payout to family and heirs if you die

After you’ve been taking income for decades, after you’ve borrowed loans and collected income for disability or illness, one key benefit remains. When it’s your time to pass away, this same policy will still pay out a tax-free death benefit. This benefit (which has been growing all these years) and can pay out in the millions of dollars in your older years. No probate, no capital gains, no estate administration costs, just a massive check to an individual or a trust.

Can a 401(k) do all that?

Best of All, There are Some Additional Advantages for Business Owners

Policy premiums can sometimes be business deductions, providing a tax advantage. Plus, many companies offer additional premiums for certain key employees that cannot be deducted from the business.

You can use policy cash value loans to fund business growth, purchase equipment, or whatever your small business needs! Since your business assets will likely be more significant than your policy cash value, you can borrow from the cash value to fund growth or capital expenses.

You have the flexibility to pay a reduced premium every other year if that works better for your cash flow. You can also increase or decrease your premiums as needed.

The death benefit from an Indexed Universal life insurance policy is entirely tax-free. This can be used as a legacy to your family for their protection and prosperity and often provides the best possible vehicle for transferring wealth from one generation to the next.

Bypass estate and estate taxes. When your business is the life insurance policy beneficiary, up to $5 million of your taxable estate can be bypassed entirely by you and your heirs.

What’s The Next Step?

If you want to see if an Indexed Universal Life policy is a good choice for your retirement plan, let’s connect! In a quick 15-minute phone call, I can find out if you qualify. If you do, I will gather some information that will enable me to design a specific plan for you that might just blow your mind.

The best time to plant a tree was ten years ago. The second-best time is today.