Mixing Life Assurance and Pensions: Good or Bad?
Life assurance policies offer individuals looking for security for their family great benefits, and some find that taking advantage of adding pensions to the equation can benefit them even more tax-wise. However, some say that this type of strategy can dangerously compromise benefits if handled improperly.
Life assurance policies and pensions in this scenario are blended by turning the level-term policy into a pension fund. As a result, the following can occur:
- Up to 50 percent of your pension can be use to pay the premium on whole life assurance policies, or up to 25 percent on universal life. Because these premiums are a part of the pension, they are fully tax-deductible. However, what is not considered a part of the pension is added to personal income at tax time and must be paid by the insured.
- If the person owning the policy dies while still participating in the pension plan, the benefits will be tax-free; however, the cash values will still be fully taxable.
There are a few problems that can arise from blending life assurance policies and pensions. Lets look at what they are:
- If you decide to roll your pension into an IRA upon retirement, you will have to pay taxes on the policys cash value prematurely.
- The proceeds of life assurance policies are included in the estate, which means they are subject to estate taxes if your net worth is more than $1 million.
- If you stop working, your fund will cease at worst and remain static at best, meaning the funds that contributed to the premium could possibly become invalidated.
- Because expenses for life assurances policies are very high, the investment yields will lower significantly; for some, this makes investing outside of the policy much more profitable.
If youre sure that blending life assurance policies and pensions will work, then by all means hop on board. But if youre at all uncertain about your financial future, its not a bad idea to steer clear of this risky combination.