Life insurance isn’t just about replacing income after a loss. Structured the right way, it can be a flexible engine for tax-efficient retirement planning, multigenerational legacy building, and smart long-term care protection. 

Recently on the Secure Your Retirement podcast, we spoke with life-insurance specialist Jim Bowman. This article focuses on that conversation, covering how modern cash value life insurance can complement your investments, reduce Retirement Taxes, and add resilience to your plan as laws evolve (think potential 2025 tax changes and shifting Gift and estate taxes rules). We’ve also sprinkled in some relevant links to other resources on our site, so you can expand your learning at your own pace. 

Learning the core steps of building a secure plan will help you read this article. Read the steps in “Considering Retirement Planning Goals”. 

Why Life Insurance Belongs in a Modern Retirement Plan 

When most people hear “life insurance,” they picture a term policy that covers the mortgage years and then expires. That’s useful, especially early in life, but it’s only one tool. Permanent, cash value life insurance (e.g., whole life, indexed universal life, or variable universal life) adds living benefits you can leverage while you’re alive: 

• Tax planning power: Potential tax-deferred growth with tax-free access via policy loans and withdrawals to basis under current rules (IRC §§101(a), 72). This can be a valuable hedge against Taxes in Retirement. 

• Legacy efficiency: An income-tax-free death benefit for beneficiaries, helping you pass more (net of Retirement Taxes) to heirs or charities. 

• Long-term care (LTC) flexibility: Riders that let you accelerate the death benefit to pay qualifying LTC expenses, often a more predictable alternative to traditional LTC policies. 

To learn more, read “The Retirement Checklist Challenge” for a quick way to spot gaps across income, taxes, health care, and more. 

Part 1: Life Insurance as a Tax Strategy 

The case for a tax‑free “third bucket” 

Most savers concentrate on two tax buckets: 

1. Pre‑tax (401(k)/IRA): you get a deduction today, but withdrawals are taxed later and subject to RMDs. 

2. Taxable brokerage: flexible, but ongoing dividends/interest and realized gains create an annual tax drag. 

A well-structured life policy can serve as a third bucket: 

3. After‑tax to tax‑free: premiums are paid with after‑tax dollars; cash value may grow tax-deferred; and, if the policy stays in force and is managed prudently, policy loans can provide tax‑free access to cash value. This is why some call it a “Roth on steroids” (conceptually) with important caveats we manage for clients. 

This can be especially attractive amid headlines about 2025 tax changes, sunsets of prior tax cuts, and potential adjustments to the Estate tax exemption and Charitable deduction. No one knows where rates will land; building a tax-diversified plan helps you adapt. 

Design matters: avoiding MECs and keeping access flexible 

A policy must be funded and designed correctly to protect its tax treatment. Overfund too quickly, and you may create a Modified Endowment Contract (MEC), changing the taxation of distributions. Underfund or over‑insure, and you pay more for insurance than necessary. Our role is to identify the death benefit and premium schedule that keeps costs low and flexibility high while staying within IRS funding corridors. 

Life Insurance with other tax strategies 

• Roth conversions: Great when brackets are low. But you may want a parallel track, funding cash value life insurance, to diversify legislative risk. 

• Qualified Business Income (QBI deduction): If the QBI deduction phases out or changes, business owners often seek additional after‑tax accumulation vehicles; life insurance can help. 

• Giving strategy: Pairing policy design with your Charitable deduction plans (or funding a policy for a favorite charity) can increase impact. 

• RMD planning: If RMDs create unwanted taxable income, some families redirect a portion of those dollars (net of tax) to build a policy that later replenishes heirs, often more than the tax cost removed. 

Taylor Wolverton, CFP™, Enrolled Agent, lays out the basics of RMDs in  “The ABCs of RMDs: Required Minimum Distributions”. 

Part 2: Life Insurance as a Legacy Engine 

Multigenerational design 

Many clients want to support a spouse, then children or grandchildren. Life insurance can: 

• Replace wealth used for spending or charitable giving. 

• Equalize inheritances when illiquid assets (like a business or real estate) will pass to only some heirs. 

• Amplify gifts to 501(c)(3) organizations with tax‑free death benefit proceeds. 

Keeping an eye on estate thresholds 

The current Estate tax exemption is slated for adjustment; many expect future Gift and estate taxes thresholds to be lower than today’s. Even families who never expected to be taxable may face exposure later. A policy owned by an irrevocable life insurance trust (ILIT) can keep proceeds outside your taxable estate. We coordinate with your estate attorney to align ownership and beneficiary designations with your plan. 

A note on headlines and proposals 

From time to time, proposals surface touching auto loan interest deduction, family savings ideas, or other tax credits. We monitor changes so your policy and beneficiary strategy remain aligned regardless of what becomes law. 

Part 3: Life Insurance for Long‑Term Care (LTC) 

Why LTC via life insurance? 

Traditional LTC insurance was often priced with optimistic assumptions about lapse rates and claims experience, which contributed to steep premium increases for many policyholders. Hybrid life insurance with LTC or chronic illness riders takes a different approach: it allows you to accelerate the death benefit, tax‑free under IRC §101(g), if you’re unable to perform two of six activities of daily living or suffer a qualifying cognitive impairment. 

Advantages: 

• No “use it or lose it”: If you don’t need care, your beneficiaries receive the death benefit. 

• Predictability: You control funding; there’s no surprise rate‑increase letter years later. 

• Tax clarity: Benefits applied to qualifying care are generally received tax‑free. 

How benefits typically work 

Policies vary, but a common design accelerates a portion of the death benefit (for example, 2% per month) for up to 50 months after you qualify. If you purchased $500,000 of death benefit, that could mean up to $10,000/month available for care. If you use $300,000, the remaining $200,000 still passes to beneficiaries tax‑free. We’ll help you calibrate the benefit to your likely needs and preferences. 

“Long Term Care Planning Solutions” goes into more detail. 

Part 4: Frequently Asked Questions 

“Isn’t life insurance just a cost?” 

Term insurance is pure cost; and that’s fine when you need maximum death benefit per premium dollar for a defined period. Permanent insurance has higher early costs (just like building a five‑story apartment before any tenants move in), but the long‑term cost per dollar of benefit can be modest while adding tax and liquidity advantages. The keys are design, funding discipline, and time horizon. 

“How long do I have to fund it?” 

We usually match funding to your cash flows and goals; 5, 7, 10, or more years. Funding too fast can trigger MEC status; too slow may undercut long‑term performance. We model scenarios in your plan so you can see the trade‑offs before you decide. 

“Can I access cash before 59½?” 

Yes, unlike retirement accounts, there’s no 10% early withdrawal penalty. Many clients use policy loans to bridge a business investment, remodel a home, or supplement income during a market downturn so they don’t have to sell assets at depressed prices. 

“How does this interact with my Retirement planning strategies?” 

We use a three‑bucket system: 

1. Cash for near‑term needs. 

2. Safety & Income bucket to fund essentials reliably (Social Security, pensions, and conservative fixed‑income/annuities). 

3. Growth for long‑term inflation fighting (diversified equities and Alternative Investments when appropriate). 

Cash value life insurance can straddle buckets 2 and 3, supporting income flexibility while compounding over time. That flexibility is valuable during policy, trade, or market disruptions (trade headlines, tariffs chatter, or US China trade war-style volatility that can ripple into the tariffs stock market narrative). 

“The Retirement Bucket Strategy” expands on this method. 

“What are the risks?” 

• Performance risk: Whole life guarantees are lower but steadier; indexed policies credit interest based on an external index with caps/participation rates; variable policies carry market risk. We’ll align structure with your risk tolerance. 

• Policy lapse risk: Loans create flexibility, but unmanaged borrowing can stress a policy. We monitor annually to keep it healthy. 

• Legislative risk: Diversified tax buckets plus ongoing reviews help you adapt if 2025 tax changes or later laws alter the landscape. 

Case Studies (Illustrative, Not Advice) 

1) The RMD Re‑Router 

Sharon is 73 with sizeable IRAs and a $35,000 annual RMD she doesn’t need for lifestyle. We coordinated with her CPA to withhold taxes on the RMD, then redirected part of the after‑tax remainder into a seven‑pay, non‑MEC policy with an LTC rider. She gained: 

• A growing pool of accessible cash value 

• A tax‑free death benefit projected to more than replace cumulative taxes paid 

• LTC leverage for a potential need in her 80s or 90s 

2) The Business Owner’s Flex Bucket 

Luis, a 48‑year‑old S‑Corp owner, maximizes retirement plan contributions and benefits from the QBI deduction in most years. We layered a 10‑year funding schedule into an indexed life policy to build an after‑tax liquidity source for opportunities. During a slowdown, he paused contributions without penalty, preserving flexibility. 

3) The Legacy Equalizer 

A family plans to leave the closely held business to two children who work there and equal value to two who don’t. A trust‑owned life policy creates tax‑free liquidity at the second death, equalizing inheritances and minimizing Gift and estate taxes complexity. 

How We Implement 

1. Plan first: Map your cash flows, tax brackets, and estate goals. Tools like our retirement checklist help ensure nothing is missed. 

2. Policy architecture: Choose product type, riders (including LTC/chronic illness), ownership structure (individual, trust, or business), and funding pace. 

3. Underwriting: Health/financial underwriting tailors the policy to your profile. 

4. Ongoing care: Review annually to adjust funding, monitor loans, and confirm beneficiaries and trustee instructions. 

To learn how to translate goals into a timeline, read “The Retirement Checklist Challenge”: The Retirement Checklist Challenge 

Questions on this topic? Looking for more resources? Once you gather your thoughts, schedule a complimentary 15 minute call with us to learn more.