Transcript:
Hello, everyone, I'm Derek Merkler, fiduciary financial advisor with your Tip of the Week. This week, I'm discussing the true meaning of the term tax free income that is used in whole life and Universal Life Insurance marketing pitches. Many people have been on the receiving end of a sales pitch for whole life insurance or Universal Life Insurance. Most of these pitches include some form of it will grow with you and you can achieve tax deferred growth, and that the policy will allow you to create tax free income in retirement. Yes, I'll be using more air quotes in this video. It's true that the interest earned on cash value is tax deferred. Insurance laws designed that way because life insurance is generally supposed to be just that insurance. The payout therefore goes to the beneficiary without taxes in most circumstances. But marketers find it more effective to advertise whole life insurance policies and their variations as a kind of investment or asset that you can use later in life to fund retirement or other spending needs. This is also true. What they don't tell you in commercials or sales pitches, though, is that the way you access your cash value tax free is through a policy loan with the cash value as collateral. Guess what? You don't have to pay taxes. But it said you have to pay interest on the loan amount. I recently evaluated a client's whole life policy loan and their interest rate in today's low interest world was 8%. So instead of paying 1015, or 20% in taxes one time, he said he had to pay that interest for the life of the loan. When people take on policy loans to fund their retirement, they'll owe that interest every year for the rest of their lives. The final nail in that coffin is that if the policy owner doesn't pay that interest, the policy lapses and most of that tax free income becomes taxable income all at the same time. So with whole life insurance, and really any other financial product, use it for its primary purpose that's appropriate for your financial plan. And don't fall for the marketing hype. If you have questions on this or any other financial topic, send me a message using the information posted in the credits. Until next time.