Key Points:
- Beyond its use for traditional income replacement, permanent life insurance can be used to help achieve additional financial goals, such as providing supplemental income during one's lifetime through overfunding, which allows for tax-deferred growth and tax-advantaged income distributions.
- By holding a life insurance policy within an Irrevocable Life Insurance Trust (ILIT), you can remove assets from their taxable estate, thereby protecting them from estate taxes, divorce settlements, or lawsuits.
Permanent life insurance policies may offer the opportunity to accumulate significant cash value on a tax-deferred basis, which can be accessed through withdrawals and loans to generate additional tax-advantaged retirement income.
When most of us think about life insurance, we view it as an income replacement strategy—a means to provide our loved ones with a tax-free, lump sum death benefit to help offset the loss of potential future income, as well as pay off any estate-related debts. For individuals with significant wealth, however, a permanent life insurance policy can also help accomplish two other important financial goals:
- For high earners who’ve maxed out their traditional tax-deferred retirement savings vehicles (e.g., 401(k) and IRA accounts), it offers an opportunity to gain additional tax deferral.
- A policy can also be purchased and held inside an irrevocable trust to better protect assets for future generations, and to instill some controls on how the assets are used.
Traditional Income Replacement
At its core, life insurance affords your family with protection against several potential worst-case scenarios, such as you or your spouse passing away and leaving significant medical bills, as well as a major hole in the family’s income. With an in-force life insurance policy, the financial future of your beneficiaries wouldn’t be jeopardized.
For many people, a term life policy will suffice—it’s affordable and straightforward. And it can provide enough money to pay off a mortgage and other debts, cover a child’s college expenses, and leave your spouse with a nest egg. Term life offers death benefit coverage for a predetermined period (typically from five to 30 years), but at the end of the term, the policy expires with no residual value or return of premiums.
Conversely, permanent life insurance provides a death benefit for your entire life, as long as premiums are paid to keep the policy in force. Depending on the terms of the coverage, you also may be able to access the accumulated cash value of the policy through withdrawals and loans.
A Source of Additional Tax-Deferred Retirement Income
While the main purpose of life insurance is to provide for your beneficiaries in the case of your death, a permanent life policy can also provide supplemental income during your lifetime. By overfunding (contributing more to the policy than the required annual premium), you have an opportunity to accumulate significant cash value on a tax-deferred basis. You can then access this cash value in the future (through withdrawals and loans) to generate additional tax-advantaged retirement income.1
Overfunding can help drive up the policy’s cash value—transforming it into an investment vehicle that offers tax-deferred growth, remarkably efficient tax-advantaged income distributions, and an income-tax-free death benefit.
The extra retirement income generated by overfunding may even allow you to delay your Social Security start date to enhance your monthly benefit amount. However, overfunding isn’t appropriate for everyone, and it’s important to note that federal tax law limits the amount of premium contributions that can be made to a policy to retain certain tax advantages.
If you’re in reasonably good health, have maxed out all your traditional tax-deferred savings opportunities and want to put away more, are concerned about future tax rates, and value the idea of tax-free retirement distributions, this could be a strategy you may want to consider carefully.
Tax-Efficient Wealth Transfer
The Tax Cuts and Jobs Act (TCJA) doubled the lifetime gift and estate tax exemption. If it was to expire, as many anticipated, many people would face federal estate tax liabilities. However, thanks to the recently passed One Big Beautiful Bill Act (OBBBA), the higher exemption amounts are permanent.
Starting in 2026, OBBBA increases the lifetime gift tax exemption amount to $15 million per person ($30 million per married couple), indexed for inflation. This allows for a more long-term approach to wealth transfers without the uncertainty of potential tax increases from expiring tax provisions. You’ll have greater flexibility in deciding whether to transfer assets during your lifetime or wait until death for the "step-up" in cost basis on assets.
Irrevocable Life Insurance Trusts (ILITS)
Trusts can be a powerful and flexible component of your estate plan, helping to provide for future generations. An Irrevocable Life Insurance Trust (ILIT) can be used to hold a life insurance policy (as the policyholder with an appointed trustee), so when you die, it collects the death benefit (as the policy's beneficiary) and distributes the death benefit to the beneficiaries of the trust, as per your wishes. This can help ensure that estate taxes, divorce settlements, or lawsuits don’t eat away your children’s and/or grandchildren’s financial legacy.
In effect, the trust becomes both the owner of the policy and the beneficiary of the death benefit proceeds, not only removing those assets from your taxable estate but also leveraging their ultimate value. One of the most tax-efficient ways to pay the annual insurance policy premiums is to use your annual gift tax exclusion (in 2026, $19,000 per year for each trust beneficiary) to fund the trust.
However, there are a few downsides to permanent life insurance—it's considerably more complicated and more expensive than a term life policy. That being said, if your primary objective is additional tax deferral and/or efficient wealth transfer rather than income replacement, a permanent life policy may be an appropriate choice.
Your Financial Advisor can help you determine what amount and type of insurance would best meet your planning needs and objectives.
Working With Janney
Depending on your financial needs and personal preferences, you may opt to engage in a brokerage relationship, an advisory relationship or a combination of both. Each time you open an account, we will make recommendations on which type of relationship is in your best interest based on the information you provide when you complete or update your client profile.
If you engage in a brokerage relationship, you will buy and sell securities on a transaction basis and pay a commission for these services. Our recommendations for the purchase and sale of securities will be based on what is in your best interest and reflect reasonably available alternatives at that time.
If you engage in an advisory relationship, you will pay an asset-based fee, which encompasses, among other things, a defined investment strategy, ongoing monitoring, and performance reporting. Your Financial Advisor will serve in a fiduciary capacity for your advisory relationships.
For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.
By establishing a relationship with a Janney Financial Advisor, we can build a tailored financial plan and make recommendations about solutions that are aligned with your best interest and unique needs, goals, and preferences.
Contact us today to discuss how we can put a plan in place designed to help you reach your financial goals.
Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
