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Aug 15, 20232 min

Reducing Future Taxes: Comparing Universal Life Insurance with a 401k

A key benefit of both Indexed and Variable Universal Life Insurance is that they could help you reduce your future taxes. Here’s how:

  1. Your policies cash-value is expected to grow from contributions you make and from returns your policy generates.
  2. This growth is tax-deferred.
  3. You can loan cash in an active policy to yourself, tax-free. This applies to funds you have contributed and returns your policy has generated.

It is this unique distribution method that makes Universal Life so appealing, particularly when compared with other financial vehicles like a 401k.

With a 401k, distributions you take in retirement are taxed as ordinary income and distributions taken before 59.5 could be penalized. To help mitigate this some 401k plans offer loans that will typically need to be repaid within five years and require regular payments. Importantly, this is not to diminish 401ks, especially if your employer matches. We highlight 401ks here because they are a financial vehicle many people are familiar with.

By contrast, when you loan cash from your active Universal Life policy to yourself you will not owe taxes and you can decide when and if you want to pay it back. (Any unpaid loans will typically be deducted from the death-benefit that goes to your beneficiaries when you pass.) There is also no age restriction for when you can access the funds. For fully liquid VUL policies you’d be able to access your cash-value almost immediately, and for IULs you can typically access your funds after a window of time.

Importantly, this is a reasonably high level overview meant to showcase one of the unique features of Universal Life insurance. Given that everyone’s financial situation is different we recommend talking to one of our experts at Amplify Life to get customized information aimed at helping you achieve your financial goals and objectives.

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