How to Use Life Insurance for Wealth Building (5 Ways)

Most people think of life insurance as protection for their family. You pay a premium, and the insurance company provides a death benefit if you pass away while the policy is active.

For certain high-income earners and business owners, life insurance can play another role. When structured correctly, life insurance for wealth building may provide tax-deferred growth, access to capital, retirement flexibility, and an efficient way to transfer wealth.

This strategy is not appropriate for everyone. Before purchasing a policy, you need to understand how the cash value works, what the policy costs, how loans affect your coverage, and where life insurance fits within your complete financial plan.

 

TL;DR

• Life insurance for wealth building generally uses permanent life insurance that accumulates cash value.
• The cash value can grow tax-deferred, meaning you generally do not report the policy’s annual growth as current taxable income.
• You may be able to access the cash value through withdrawals or policy loans.
• Policy loans charge interest, reduce the amount available to beneficiaries, and may create tax consequences if the policy lapses or is surrendered.
• Life insurance premiums are generally paid with after-tax dollars and do not automatically create a tax deduction.
• The death benefit is generally excluded from the beneficiary’s federal gross income, although exceptions apply.
• Overfunding a policy can cause it to become a modified endowment contract, or MEC, which changes how distributions and loans are taxed.
• Life insurance generally should not be your first savings or retirement strategy. It is more likely to make sense after you have established emergency savings and evaluated traditional retirement accounts.
• There is no universal contribution limit for life insurance. The appropriate funding level depends on the policy’s death benefit, design, underwriting, and MEC limits.

 

What Does It Mean to Use Life Insurance for Wealth Building?

Using life insurance for wealth building means purchasing a permanent life insurance policy that includes both a death benefit and a cash value component.

The death benefit protects your beneficiaries if you pass away. The cash value accumulates inside the policy and may become a financial resource you can access during your lifetime.

This differs from term life insurance. Term insurance provides coverage for a limited period and generally does not build cash value. It is primarily designed to replace income, cover debts, or protect your family during a specific stage of life.

Permanent life insurance is designed to remain in force for your lifetime, provided the policy is adequately funded and its requirements are met. Because the insurance company expects to pay a death benefit eventually, permanent insurance generally costs more than term coverage.

A cash value policy can become part of a broader wealth-building plan, but it should not be treated as your entire investment strategy. It is one financial vehicle that may work alongside your business assets, retirement accounts, cash reserves, real estate, and taxable investments.

How Does Life Insurance for Wealth Building Work?

The strategy can be divided into three stages: funding the policy, accumulating cash value, and accessing the policy’s benefits.

1. You fund the policy with after-tax money

In most situations, you pay life insurance premiums using money that has already been taxed. You generally do not receive a personal income tax deduction simply because the policy has a cash value component.

Certain employer-owned policies, employee benefit arrangements, and retirement plan strategies may follow different rules. Those arrangements require separate analysis and should not be confused with purchasing a personally owned permanent life insurance policy.

The amount you contribute must also support a legitimate amount of life insurance. You cannot simply place an unlimited amount of money into a policy with a nominal death benefit and expect the contract to retain all of its intended tax advantages.

2. The cash value grows tax-deferred

Part of your premium pays for the cost of insurance, commissions, administrative expenses, and any policy riders. The remaining amount may contribute to the policy’s cash value, depending on the contract and how it is designed.

The cash value can grow without producing annual taxable interest, dividends, or capital gains. This is why permanent life insurance may appeal to high-income earners who have already evaluated other tax-advantaged accounts.

Tax-deferred growth does not guarantee that the policy will outperform a traditional investment account. You must compare the tax treatment with the policy’s commissions, insurance costs, surrender charges, crediting terms, and investment limitations.

3. You access the cash value

You may be able to access the policy’s value through withdrawals or policy loans.

A withdrawal permanently removes money from the policy and may reduce both the cash value and death benefit. The tax treatment depends on your basis in the contract, the amount withdrawn, and whether the policy is a modified endowment contract.

A policy loan uses the policy’s value as collateral. Properly managed loans from a non-MEC policy may provide access to capital without creating immediate taxable income.

The loan is not free money. The insurer charges interest, and an unpaid balance generally reduces the death benefit paid to your beneficiaries. If the policy lapses or is surrendered with a substantial loan balance, you may also create taxable income.

What Are the Tax Benefits of Life Insurance?

The potential tax benefits of life insurance can make it useful for long-term wealth planning. Each benefit comes with rules and limitations.

Tax-deferred cash value growth

Cash value growth generally remains inside the policy without being reported as current taxable income each year. This differs from a taxable brokerage account, where dividends, interest, and realized capital gains may create annual tax obligations.

The value of tax deferral depends on your tax rate, holding period, policy costs, and available alternatives. A tax advantage does not automatically make a policy a good investment.

Tax-advantaged access through policy loans

When you borrow against a properly structured non-MEC policy, the loan proceeds are generally not treated as taxable income at the time of borrowing. This can provide liquidity for retirement, business purchases, real estate, or other financial needs.

Policy loans must be carefully monitored. Interest can accumulate, the death benefit can decline, and a lapse or surrender may turn part of the outstanding balance into taxable income.

The IRS rules on surrendering a life insurance policy explain that proceeds exceeding your investment in the contract generally must be included in income. Your investment in the contract is generally based on premiums paid, adjusted for certain previous amounts received.

Income-tax treatment of the death benefit

Life insurance proceeds paid to a beneficiary because of the insured’s death are generally excluded from the beneficiary’s federal gross income. Exceptions may apply, including certain transfers for value and employer-owned policies.

The IRS provides additional guidance on the tax treatment of life insurance proceeds.

Income-tax-free does not necessarily mean estate-tax-free. Depending on the ownership and structure of the policy, life insurance may be included when calculating the insured’s gross estate. The IRS identifies insurance among the assets that may be considered for federal estate tax purposes.

A Life Insurance Policy Loan Example

Assume you have accumulated $1 million of cash value inside a permanent life insurance policy. You want to access $100,000 to purchase equipment, acquire another business asset, or invest in real estate.

Instead of withdrawing $100,000, you take a policy loan.

For this simplified example, assume:

• Cash value before the loan: $1,000,000
• Policy loan: $100,000
• Hypothetical loan interest rate: 5%
• First-year loan interest: $5,000 before compounding or payments
• Net policy value after subtracting the loan: $900,000 before other adjustments

Depending on the contract, the insurer may continue applying interest credits, index-linked credits, or dividends to the cash value associated with the borrowed funds. Other policies may apply a separate crediting method to that portion of the value.

If the policy receives a hypothetical 7% credit while the loan costs 5%, the illustration would show a positive difference of two percentage points before considering other expenses. This is sometimes called positive arbitrage.

That difference is not guaranteed profit. Crediting rates can change, indexed interest may be zero during a crediting period, policy expenses continue, and loan interest may compound.

You can repay the $100,000 loan, make partial payments, or leave the balance outstanding. If you do not repay it, the loan and accumulated interest will generally reduce the death benefit.

The example will look different for every policyholder. Your results depend on the type of policy, cash value, loan provisions, interest rate, policy expenses, crediting performance, age, health, and how long the policy remains active.

What Types of Life Insurance Can Build Wealth?

Term, whole, and universal life insurance serve different purposes. Understanding those differences is essential before selecting a policy.

Term life insurance

Term life insurance provides coverage for a defined period, such as 10, 20, or 30 years. It generally does not accumulate cash value.

Term insurance is often appropriate when your primary goal is affordable protection. It can replace income, pay off debt, or help your family maintain its standard of living if you die during the term.

Because it does not build cash value, term insurance is not typically used directly for a life insurance wealth-building strategy.

Whole life insurance

Whole life insurance provides permanent coverage and includes a cash value component. The policy may offer contractual guarantees, subject to the insurer’s claims-paying ability and your compliance with the policy’s requirements.

A participating whole life policy may also pay dividends. Those dividends are not guaranteed and can change based on the insurer’s performance and other factors.

Whole life insurance is generally more predictable but less flexible than universal life insurance. It may be used as a conservative component of a broader financial plan, although its costs and projected returns should be compared with other options.

Universal life insurance

Universal life insurance provides permanent coverage with greater flexibility in premiums and death benefits, subject to the policy’s terms and funding requirements.

Several forms of universal life insurance are available.

Indexed universal life insurance credits interest using a formula linked to a market index. The policy is not directly invested in that index, and growth is affected by participation rates, caps, spreads, and other contract terms.

An indexed policy may have a zero-percent crediting floor, but that does not mean the policy cannot lose cash value. Insurance charges and other expenses can still be deducted during a period with no credited interest.

Variable universal life insurance allows cash value to be allocated among investment subaccounts. It offers greater market exposure but also carries market risk. Poor investment performance can reduce the cash value and may require additional funding to keep the policy active.

How Should a Wealth-Building Policy Be Designed?

There is no universal life insurance policy that works for every business owner. The design should reflect the specific reason you are purchasing it.

A policy can generally be structured to prioritize cash value or death benefit.

Cash-value-focused design

A cash-value-focused policy is designed to build accessible value that you may use during your lifetime. The policy generally uses a death benefit that supports the planned premium while maintaining the intended life insurance classification and avoiding MEC status.

Because insurance costs are connected to the death benefit, careful design can affect how efficiently the cash value accumulates. The policy still needs to provide legitimate life insurance coverage and satisfy the applicable federal rules.

Death-benefit-focused design

A death-benefit-focused policy prioritizes the amount paid to your beneficiaries. This may be appropriate when your main goals include replacing income, providing an inheritance, paying estate expenses, supporting a dependent, or funding a business succession plan.

Cash value may still accumulate, but accessible cash is not the primary goal. A larger death benefit may also produce higher insurance costs.

Chronic care riders

Some permanent life insurance policies offer a chronic illness or accelerated death benefit rider. A qualifying event may allow you to access part of the death benefit during your lifetime.

These provisions vary significantly by contract. A chronic illness rider should not automatically be treated as a substitute for comprehensive long-term care insurance without comparing the eligibility rules, benefit amounts, costs, and limitations.

When Does Life Insurance for Wealth Building Make Sense?

Life insurance for wealth building is more likely to fit when you already have a strong financial foundation and a specific reason for purchasing permanent coverage.

Your business produces consistent profit

Permanent life insurance usually requires a long-term funding commitment. Consistent business profit and cash flow make it easier to pay premiums without sacrificing payroll, taxes, emergency reserves, or operating capital.

Some universal life policies allow you to adjust or pause premiums. That flexibility does not eliminate the need for adequate funding. Reduced contributions may affect cash value growth and the policy’s ability to remain in force.

Your current financial needs are covered

Before funding a permanent policy, you should generally have adequate personal and business emergency reserves. You should also have a plan for debt, estimated taxes, and upcoming business expenses.

This is not an IRS requirement. It is a practical planning guideline based on the liquidity and long-term commitment permanent insurance requires.

You have evaluated your retirement accounts

A 401(k), IRA, profit-sharing plan, or other qualified retirement plan may provide an immediate tax deduction or employer contribution opportunity. Those benefits may be more valuable than funding life insurance with after-tax dollars.

Retirement plan testing and employee demographics can sometimes limit how much a business owner can contribute efficiently. In that situation, life insurance may provide an additional planning vehicle after the traditional retirement options have been evaluated.

You have a permanent need for coverage

Permanent life insurance is easier to justify when you expect the need for a death benefit to continue throughout your life.

You may want to leave assets to your heirs, support a dependent, pay potential estate expenses, fund a buy-sell arrangement, or provide capital for business succession. If the need will end after a mortgage is paid or your children become independent, term insurance may provide sufficient protection at a lower cost.

You want another source of accessible capital

A properly funded policy can provide access to capital through withdrawals or policy loans. This may be useful when purchasing business assets, investing in real estate, or creating supplemental retirement income.

Before borrowing, compare the policy loan with other financing options. Consider the loan interest, effect on the death benefit, lapse risk, and expected use of the money.

You have already planned for retirement

A simple framework is to think about your finances in three stages:

1. Are your current bills, debts, and emergency reserves covered?
2. Are you building enough assets and cash flow for retirement?
3. Are you ready to plan for a tax-efficient inheritance or estate?

Life insurance becomes more relevant once the first two stages are adequately addressed. It generally should not be the first financial tool you use.

When Life Insurance for Wealth Building Does Not Make Sense

A cash value policy can create more cost and complexity than benefit when it does not match your financial circumstances.

You are still building basic savings

If you do not have an emergency fund or haven’t started saving for retirement, permanent life insurance may not be the best starting point. More liquid and less complex accounts may provide greater flexibility.

You can still use term insurance to protect your family while building savings elsewhere. Permanent coverage can be reconsidered later if your income, assets, and goals change.

Your income is inconsistent

If your business profit changes substantially from year to year, maintaining the policy may become difficult. Underfunding can reduce projected cash value and increase the risk that larger contributions will be needed later.

Ask to see what happens if you contribute less than planned or if the policy earns less than the original illustration assumes.

You need short-term liquidity

Permanent policies commonly include surrender charges during their early years. The cash surrender value may initially be much lower than the premiums you have paid.

Money needed for payroll, estimated taxes, emergencies, or near-term purchases generally should not be locked into a policy with limited early liquidity.

You have not used simpler tax-advantaged options

Life insurance should not automatically replace your retirement plan. If you have not evaluated available 401(k), IRA, or profit-sharing opportunities, you may be overlooking simpler ways to save and receive potential tax benefits.

The comparison should account for deductions, contribution limits, fees, accessibility, investment options, required distributions, and your long-term insurance needs.

The recommendation begins with a product

Be careful when an advisor presents permanent life insurance as the solution to every investment, tax, retirement, or financing problem.

The analysis should begin with your goals, cash flow, current assets, insurance needs, risk tolerance, and time horizon. The policy should be selected only after those factors are understood.

The Modified Endowment Contract Requirement

A major compliance concern when using life insurance for wealth building is avoiding unintended modified endowment contract status.

A life insurance policy generally becomes a MEC when it fails the seven-pay test under Internal Revenue Code Section 7702A. In simplified terms, the test limits how quickly premiums can be paid relative to the policy’s benefits during the applicable testing period.

This is not a single annual contribution limit that applies to every policyholder. The amount you can contribute depends on the policy’s design, death benefit, age of the insured, underwriting, and other contract-specific factors.

The IRS explains that a policy fails the seven-pay test when accumulated payments exceed the applicable accumulated seven-pay premiums. You can review the technical definition in the IRS guidance on modified endowment contracts.

If a policy becomes a MEC, the contract remains life insurance, but distributions receive less favorable tax treatment. Gains are generally treated as coming out before your basis, and policy loans may be treated as taxable distributions.

Common MEC mistakes include:

• Paying a large additional premium without checking the policy’s funding limit
• Assuming life insurance has no contribution restrictions
• Making a catch-up contribution without coordinating with the insurer
• Changing the policy’s death benefit without reviewing the tax consequences
• Failing to confirm whether a material policy change restarts the testing period
• Relying only on the original illustration after the policy has changed

Keep copies of your policy documents, annual statements, premium records, loan statements, in-force illustrations, and correspondence regarding MEC status. Before making an unusually large payment, ask the insurer or servicing advisor to confirm the available funding room.

Hidden Costs of Building Wealth With Life Insurance

The tax advantages of permanent life insurance must be compared with the complete cost of owning and maintaining the policy.

Agent commissions

Permanent life insurance may include significant upfront commissions paid to the selling agent. These acquisition costs can contribute to a low cash surrender value during the policy’s early years.

A commission does not automatically make a policy unsuitable. You should still understand how the advisor is compensated and whether that compensation may influence the recommendation.

Cost of insurance

Part of your premium pays for the death benefit. The amount depends on factors including your age, health, policy type, death benefit, and underwriting classification.

In some universal life policies, insurance charges may increase as you age. If the cash value or premium funding is insufficient, the policy may require additional contributions to remain active.

Administrative and investment expenses

The policy may charge administrative fees, rider costs, investment expenses, and other contract charges. These costs reduce the value available for cash accumulation.

Request an illustration that clearly separates guaranteed values from non-guaranteed projections. You should understand how the policy performs under lower crediting rates and higher costs.

Surrender charges

Canceling the policy during the surrender period may result in receiving much less than the total premiums paid. The surrender-charge schedule should be disclosed in the policy documents.

This makes permanent insurance a poor choice for money you may need in the near future.

Policy loan interest

Every policy loan has a cost. Interest may be paid directly or added to the outstanding balance.

If interest continues accumulating, the loan can reduce the death benefit and increase the risk of a policy lapse. A policy loan strategy requires ongoing monitoring, especially when loans are intended to provide retirement income.

Ongoing policy reviews

A permanent policy should not be purchased and ignored. Actual performance can differ from the original illustration due to changes in crediting rates, dividends, investment performance, expenses, premiums, and loan activity.

Request an updated in-force illustration periodically. This shows the policy’s current values and projected performance based on updated assumptions.

Life Insurance Wealth-Building Decision Checklist

Before using permanent life insurance as part of your wealth-building plan, consider the following questions:

1. Do I have a legitimate long-term need for life insurance?
2. Are my personal emergency savings adequately funded?
3. Does my business have enough cash reserves for taxes, payroll, and unexpected expenses?
4. Is my business generating consistent profit and cash flow?
5. Have I evaluated my available retirement plan options?
6. Is the policy designed for cash value, death benefit, or another specific goal?
7. How much of each premium contributes to accessible cash value?
8. What commissions, insurance charges, administrative fees, and rider costs apply?
9. What are the guaranteed values compared with the non-guaranteed projections?
10. How long does the surrender-charge period last?
11. What happens if I reduce or pause my premiums?
12. How do the policy’s loan provisions work?
13. Could my planned contributions cause the policy to become a MEC?
14. What happens if the policy lapses while a loan is outstanding?
15. Who will review the policy and provide updated illustrations?
16. How does this strategy compare with term insurance, retirement accounts, and taxable investments?

Is Life Insurance a Good Way to Build Wealth?

Life insurance can support wealth building when it serves a specific purpose within a complete financial strategy. For the right person, it may provide permanent protection, tax-deferred cash value growth, access to capital, retirement flexibility, and an income-tax-efficient death benefit.

It may not be worthwhile if you lack emergency savings, have unpredictable cash flow, need short-term liquidity, or have not evaluated traditional retirement accounts. The costs and long-term funding commitment can outweigh the tax advantages when the policy is poorly designed or does not match your goals.

Life insurance for wealth building should be evaluated by running the complete numbers, not by following a broad rule or social media claim. Compare the policy’s guarantees, projected performance, expenses, loan terms, and tax treatment with the other financial vehicles available to you.

Have Your Life Insurance Policy Reviewed

If you already have a whole life or universal life policy, Matt Ruttenberg and his team can perform a policy audit. They can review the policy’s design, current health, funding, cash value, costs, and projected performance to determine whether it still supports your financial goals.

They can also help you evaluate whether a new policy has a practical role in your wealth-building strategy before you commit to it. Use the link in the show notes to connect with Matt and request a policy review.

If you want help identifying additional legal tax-saving strategies for your business, visit TaxElm to schedule a free discovery call with the team.

Frequently Asked Questions

How does life insurance for wealth building work?

Life insurance for wealth building uses a permanent policy that accumulates cash value in addition to providing a death benefit. The cash value may grow tax-deferred and can potentially be accessed through withdrawals or policy loans.

Can life insurance really help you build wealth?

Permanent life insurance can support wealth building by providing tax-deferred cash value, access to capital, and a death benefit for beneficiaries. Whether it improves your financial plan depends on the policy’s costs, funding, performance, loan provisions, and your available alternatives.

What type of life insurance is used for wealth building?

Whole life and universal life insurance are commonly used because they can accumulate cash value. Term life insurance generally does not build cash value and is designed primarily to provide affordable temporary protection.

Is cash value life insurance tax-free?

Cash value generally grows tax-deferred, but that does not make every transaction tax-free. Withdrawals, policy surrenders, lapses, outstanding loans, and MEC status can affect how the proceeds are taxed.

Can I borrow from life insurance without paying taxes?

A loan from a properly structured non-MEC life insurance policy generally does not create immediate taxable income. The loan charges interest and may become part of a taxable event if the policy later lapses or is surrendered with a gain.

Does a life insurance policy loan reduce the death benefit?

An outstanding policy loan and accrued interest generally reduce the death benefit available to your beneficiaries. Repaying the loan may restore some or all of the affected benefit, depending on the policy.

Are life insurance premiums tax-deductible?

Personal life insurance premiums are generally paid with after-tax dollars and are not deductible. Different rules may apply to certain employer-owned policies, employee benefit arrangements, and specialized retirement plan strategies.

What is a modified endowment contract?

A modified endowment contract is a life insurance policy that has failed the seven-pay test under Internal Revenue Code Section 7702A. MEC status changes how distributions and loans are taxed, generally causing gains to be recognized before the policyholder’s basis.

Should I use life insurance instead of a 401(k)?

Life insurance generally should not automatically replace a 401(k) or another qualified retirement plan. Retirement accounts may offer upfront tax deductions, employer contribution opportunities, and lower costs, while life insurance may serve as an additional tool when you also need permanent coverage.

Who is a good candidate for a life insurance wealth-building strategy?

A strong candidate typically has consistent income, sufficient emergency reserves, a long-term insurance need, and the ability to fund the policy without neglecting other priorities. Life insurance for wealth building is generally better suited to someone who has already evaluated traditional savings and retirement options.

Read the Episode Transcript on How to Use Life Insurance for Wealth Building (5 Ways)

Life Insurance for Wealth Building

Most people think of life insurance as a bill they pay to protect their families if something goes wrong. For some high-income earners and business owners, however, permanent life insurance can also support tax-efficient wealth building, access to capital, retirement planning, and long-term financial stability.

Life insurance is not the right strategy for everyone. It should be evaluated as one part of a complete financial plan, alongside emergency savings, retirement accounts, taxable investments, real estate, and business assets.

Why Business Owners Use Life Insurance to Build Wealth

Business owners often understand how leverage and access to capital can help them grow. A properly designed cash value life insurance policy may allow an owner to accumulate value and later borrow against it for business purchases, real estate, retirement income, or other opportunities.

Life insurance may also become relevant when a business owner has already contributed to a 401(k), profit-sharing plan, or defined benefit plan. Employee demographics and annual retirement plan testing can sometimes limit how much the owner can contribute efficiently. Life insurance may provide an additional planning option when traditional retirement accounts no longer meet all of the owner’s needs.

This does not mean life insurance should replace retirement accounts or traditional investments. It is another financial vehicle that may complement them.

How the Tax Benefits of Cash Value Life Insurance Work

Life insurance for wealth building generally uses permanent insurance that includes both a death benefit and a cash value component.

Premiums are usually paid with after-tax dollars, so the policyholder generally does not receive an immediate income tax deduction. The cash value can then grow tax-deferred inside the policy without producing annual taxable interest, dividends, or capital gains.

The policyholder may also be able to access the accumulated value through withdrawals or policy loans. Loans from a properly structured non-MEC policy generally do not create immediate taxable income, but they charge interest and must be managed carefully.

When the insured dies, the death benefit is generally paid to the beneficiaries free from federal income tax. Estate taxes may still need to be considered depending on the value of the estate, policy ownership, and how the coverage is structured.

Using Life Insurance Policy Loans

Assume a permanent life insurance policy has accumulated $1 million of cash value. The owner takes a $100,000 policy loan to purchase equipment, acquire real estate, or invest in another business asset.

Depending on the policy, the full cash value may continue receiving some form of interest credit, index-linked credit, or dividend while the insurer charges interest on the loan. If the policy earns a hypothetical 7% credit and the loan costs 5%, there may be a positive difference between the two rates.

That difference is not guaranteed. Policy credits can change, loan interest can compound, and insurance expenses continue to be deducted.

The owner may repay the policy loan, make partial payments, or leave it outstanding. If the loan is not repaid, the balance and accumulated interest generally reduce the death benefit paid to the beneficiaries.

A large loan can also increase the risk that the policy will lapse. If a policy with a gain lapses or is surrendered while a loan remains outstanding, the owner may face an unexpected tax bill.

Life Insurance Costs and Commissions

Permanent life insurance often carries substantial upfront costs and agent commissions. This is one reason cash value may be relatively low during the policy’s early years.

Those initial costs should be evaluated alongside the policy’s ongoing insurance charges, administrative fees, surrender charges, rider costs, and loan interest. The complete long-term cost matters more than the commission alone.

A taxable brokerage account may also involve advisory fees, investment expenses, and annual taxes on certain earnings. However, that does not automatically make life insurance less expensive or more profitable. The two options provide different benefits, risks, liquidity, and tax treatment.

You should compare the actual numbers over a realistic period before deciding whether a permanent policy belongs in your financial plan.

Life Insurance Compared With a Roth Account

Cash value life insurance is sometimes compared with a Roth retirement account because both are generally funded with after-tax dollars and may provide tax-advantaged access later.

There are important differences. A policy loan is debt secured by the policy, while a qualified Roth distribution is a withdrawal from a retirement account. Life insurance also includes insurance costs, loan interest, and a death benefit.

Life insurance policy loans are not generally subject to the same minimum-age requirement that applies to qualified Roth distributions. This may provide flexibility for early retirement or allow the owner to coordinate policy loans with withdrawals from taxable and pre-tax accounts.

The strategy still requires careful management. A policy lapse, surrender, or modified endowment contract can change the expected tax treatment.

How Much Can You Contribute to Life Insurance?

Life insurance does not have a universal annual contribution limit like an IRA or 401(k). The amount you can contribute depends on the policy’s design, the insured person’s age and health, the death benefit, underwriting, and federal tax requirements.

The policy must maintain an appropriate relationship between its cash value and death benefit. Placing too much money into the policy too quickly can cause it to become a modified endowment contract, or MEC.

A policy generally becomes a MEC when it fails the seven-pay test under Internal Revenue Code Section 7702A. MEC status changes how policy distributions and loans are taxed, reducing some of the advantages that may have motivated the strategy.

Before making a large or additional premium payment, the policyholder should confirm the available funding room with the insurance company or servicing professional.

Term, Whole, and Universal Life Insurance

Term life insurance provides coverage for a set period, such as 10, 20, or 30 years. It generally does not build cash value and is primarily used to replace income, cover debt, or protect a family if the insured dies during the term.

Whole life insurance provides permanent coverage and accumulates cash value. It is generally designed to be more conservative and predictable, although dividends and certain projections may not be guaranteed.

Universal life insurance offers greater flexibility in premiums and death benefits. This flexibility may appeal to business owners whose cash flow changes from one year to another.

Variable universal life insurance allows the cash value to participate more directly in market performance through investment subaccounts. It offers greater growth potential but also exposes the policy to market losses.

Indexed universal life insurance credits interest according to a formula linked to a market index. The policy may have a zero-percent crediting floor, but fees and insurance costs can still reduce its value during a year with no credited interest.

Designing a Policy for Cash Value or Death Benefit

A permanent life insurance policy can generally be designed to emphasize accessible cash value or a larger death benefit.

A cash-value-focused policy is intended to accumulate more value that the owner can potentially access during life. The death benefit is typically designed at a level that supports the intended funding while maintaining the policy’s tax treatment.

A death-benefit-focused policy prioritizes the amount paid to the beneficiaries. This may be appropriate for income replacement, estate planning, debt repayment, inheritance, or business succession.

Some policies also include chronic illness or accelerated death benefit riders. These riders may allow the insured to access part of the death benefit after a qualifying health event, potentially helping protect other assets from certain care expenses.

Who Should Consider Life Insurance for Wealth Building?

Life insurance for wealth building may be worth evaluating when you:

• Own a consistently profitable business
• Have adequate personal and business emergency reserves
• Have already evaluated your 401(k), IRA, profit-sharing, or pension opportunities
• Have a long-term need for life insurance
• Can commit to funding the policy over many years
• Want another potential source of capital or retirement income
• Want to create an income-tax-efficient benefit for your beneficiaries

A helpful planning framework is to consider your finances in three stages. First, determine whether your current bills, debts, taxes, and emergency reserves are covered. Second, evaluate whether you are building enough assets and income for retirement. Third, consider estate planning and efficient wealth transfer.

Permanent life insurance is generally more relevant after the first two stages have been addressed.

When Life Insurance May Not Be the Right Strategy

Cash value life insurance should not ordinarily be the first financial product you purchase. If you lack emergency savings, have high-interest debt, or have not started contributing to available retirement accounts, a permanent policy may add unnecessary cost and complexity.

The strategy may also be unsuitable when business income is unpredictable or you may need the money in the near future. Permanent policies often have surrender charges, and the accessible value during the early years may be substantially lower than the premiums paid.

Be cautious if someone presents life insurance as a solution to every financial problem. A recommendation should be based on your insurance needs, income, cash flow, current assets, taxes, liquidity needs, risk tolerance, and long-term goals.

How to Review an Existing Life Insurance Policy

If you already own whole life, universal life, or another permanent policy, request an updated in-force illustration. This can help you evaluate the policy’s current cash value, death benefit, loan balance, funding requirements, and projected performance.

A policy review should consider:

• Whether the policy is adequately funded
• How actual performance compares with the original illustration
• Current insurance and administrative costs
• Outstanding policy loans and accumulated interest
• The remaining surrender-charge period
• Whether the design still matches your goals
• Whether the policy is at risk of lapsing or becoming a MEC

If you are considering a new policy, review both the guaranteed and non-guaranteed values. Run the numbers under less favorable assumptions and compare the policy with term insurance, retirement accounts, taxable investments, and other financing options.

Life insurance can be a valuable part of a wealth-building strategy for the right person. Its value depends on selecting the right policy, designing it around a clear goal, funding it appropriately, and reviewing it regularly.

To have an existing life insurance policy audited or determine whether a new policy fits your financial plan, use the link in the show notes to connect with Matt Ruttenberg and his team.