I have struggled to determine which life insurance option is better:  permanent life insurance or term life insurance. I am constantly reading different blog posts and seeking advice from financial planners to determine which policy is best for my family. I recently finished the book Tax-Free Retirement by Patrick Kelly, which brought up some interesting points I want to share.


The thesis of this book argues that tax-deferred retirement plans can provide tax benefits for a person today; however, there can be serious negative implications in retirement with these plans. By delaying tax in these plans, taxes compound and make the tax burden worse in retirement. Patrick Kelly recommends a vehicle to save money that can be pulled out tax-free in retirement:  a permanent life insurance policy.

First, Kelly discusses nine financial land mines. These are pretty self-explanatory, but they are a good refresher if you are new to personal finance. Second, Kelly explains four retirement traps to be aware of. Third, Kelly discusses the retirement solution – permanent life insurance. Finally, Kelly reviews some individual applications and what the steps are to open a permanent life policy. Next, I will discuss the four retirement traps and then I will go into more detail on permanent life insurance.

Retirement Trap 1: Tax Trap

One of the main questions financial advisers ask their clients when determining between a traditional 401k and a Roth 401k is: What do they expect their income to be in retirement? You need to make an estimate of your income because then you can guess what your tax bracket will be. I use the word guess because a person can set a baseline on what tax rates are today, but there are important topics that Kelly discusses which could influence future tax rates:

  1. How is the U.S. going to pay for the significant amount of debt that we are in? I found two interesting articles that shed some light on this topic – one from Timeand the second article, from Quora, discusses the debt from the last two Presidents: Bush and Obama.
  2. Will social security be around when I retire?
  3. Rising healthcare costs. Will there be government run healthcare? All American citizens at age 65 are on Medicare – a government funded health care system.

Retirement Trap 2: The Access Trap

Age 59 1/2 is when you can access your tax-qualified account without incurring a tax penalty. What happens if you need to pull out money for an emergency? Well, if you take a withdrawal or loan out of your 401k before age 59 1/2 be prepared to:

  1. Pay a 10% penalty when you take out a withdrawal.
  2. If you take out a loan, you will need to pay the loan back within five years OR if you leave your company you need to pay it back within two months!
  3. Pay additional taxes because the money will be counted toward your income. Or, if you take a loan and do not pay it back that money will be taxed.

Each employer’s retirement plan is different; therefore, I recommend that you consult with your HR department to truly understand the implications.

Retirement Trap 3: Distribution Trap

Mandatory distributions begin at age 70 1/2. To determine the amount of money you will be required to take out, I provided a link to the IRS website. For example, if you have $1 million in any tax-deferred account (IRA, 401k, etc.) you would be required to take about $37 thousand out at age 70 1/2. Required minimum distributions (RMD) hold true for Roth 401(k) accounts, but RMD do not apply to Roth IRAs.

Retirement Trap 4: The Death Trap

Kelly discusses two death traps: premature death and expected death. Now death is not a fun topic to discuss, let alone discuss different types of death. Kelly’s point is that a person should prepare for the worst case to protect their family by having adequate, liquid funds for them in the case of a premature death. Kelly recommends 7-10 times a person’s salary to sufficiently cover their family. In my post on permanent versus term life insurance, I review some considerations so that you can make an accurate assessment on the amount of coverage you would need for your situation.

When discussing expected death, Kelly points out the implications of having money in a tax-qualified account: at death the entire account gets treated as taxable income paid in that year and gets taxed at the appropriate tax rate unless it is passed on to a spouse. One final note on this – remember in Retirement Trap 1 where future tax rates were discussed? It is highly unlikely that tax rates will go down; therefore, if you have over $400 thousand if your retirement you will be taxed at 40% according to the 2015 tax brackets.

Permanent Life Insurance

Finally, the book discusses the “best” solution:  permanent (or universal) life insurance. Permanent life insurance is a good bet IF you can:

  1. Afford it
  2. Are at an age that makes sense (if you are older your premiums will likely cost a significant amount)
  3. Are in good health.

Kelly’s book raised some interesting points that are worth being aware of and to consider as you plan to save for your future. Permanent life insurance can provide a safety net for you and your family. In addition, it can provide a bucket of cash in retirement that is tax-free. However, the policies are expensive and they have strict rules you need to follow. Let me know your thoughts!

Here are a few links I used to research this topic:

  1. http://www.accountingweb.com/aa/law-and-enforcement/avoiding-a-tax-bite-on-inherited-iras-and-401ks
  2. http://finance.zacks.com/401k-paid-out-upon-death-1867.html
  3. https://www.irs.com/articles/2015-federal-tax-rates-personal-exemptions-and-standard-deductions
  4. http://www.aol.com/article/2014/07/03/whole-life-insurance-bad-investment-most-people/20922084/?gen=1