No matter the age, occupation, or income, everybody should consider getting life insurance to plan for the unpredictable future. Most people will opt for a standard term life insurance product that sets them up to pass money down to loved ones after their death. Usually, this type of basic plan meets the needs of most people who don’t need anything outside of the norm and are already in good standing in their retirement plans. However, there are permanent life insurance plans, such as Maximum Funded Tax Advantage (MFTA) life insurance, that provide additional death benefits to policyholders and allow them to grow their money tax free. While MFTA life insurance may seem like the jackpot of all life insurance policies, it’s a pretty complex topic, and it requires thorough research and consideration before signing a contract. Below, we discuss the ins and outs of MFTA life insurance. What are the pros and cons? Is it something that you should consider, or are there better options? To find out more, read on.
What We'll Cover
- What Is the Difference Between Term Life Insurance and Permanent Life Insurance?
- What Is Maximum Funded Tax Advantage (MFTA) Life Insurance?
- Using Maximum Funded Tax Advantage Life Insurance as a Strategy for Retirement Planning
- Understanding the Pros and Cons of MFTA Life Insurance
- Am I a Good Candidate for Maximum Funded Tax Advantage Life Insurance?
- Final Thoughts on MFTA Life Insurance: Is it Worth Purchasing?
What Is the Difference Between Term Life Insurance and Permanent Life Insurance?
Term life insurance products only last a certain number of years and provide policyholders coverage upon a death in the family. However, term life insurance policies do not hold any cash value. Although, if you are looking for a cheaper alternative to life insurance that has lower premium payments, term life insurance is a good choice to consider. On the other hand, permanent life insurance lasts your entire life and provides coverage for a death in the family—plus, you have the ability to earn cash value by putting money away throughout your life. This means that permanent life insurance policies grant policyholders the ability to withdraw cash from the account over time, as long as you make the premium payments—which can be high—and keep a specified minimum balance in the account. Because permanent life insurance policies endure until you pass away, they are great options if you are starting your life insurance plan young and want to build cash value throughout your life. Additionally, because permanent life insurance plans double as an account for part of your earnings, you can use them to save money for retirement. Below, we discuss how you can use permanent life insurance policies to plan for retirement. There are many different types of permanent life insurance plans, one of which includes universal index life insurance—a type of MFTA life insurance policy.
What Is Maximum Funded Tax Advantage (MFTA) Life Insurance?
MFTA life insurance is considered a permanent life insurance because it is also an investment that you make over time. Brokers commonly introduce MFTA life insurance as part of a solution to retirement plans. This is because MFTA life insurance policies allow you to put a part of your earnings into an account. The benefit to having an MFTA life insurance plan is that over time, those earnings will grow tax deferred. Once you retire, you have the opportunity to take out the money that you have saved in the form of a tax-free loan. In addition to this cash value, you will also receive death benefits once a policyholder passes away—just like term life insurance. While this may sound like the perfect solution to your life insurance and retirement woes, MFTA life insurance is not for everybody. This type of life insurance has both pros and cons, which we discuss below. Although it doubles as life insurance and an investment, you should carefully consider all of your options before you make important financial decisions about life insurance. Below, we also discuss who the best candidates for MFTA life insurance are. If you fit the recommended criteria, you may be able to fully enjoy all of the great offers of MFTA life insurance. If not, you might be better off getting term life insurance and using other methods to put away earnings and grow cash value.
Using Maximum Funded Tax Advantage Life Insurance as a Strategy for Retirement Planning
With term life insurance, you only get a payout when somebody on the policy passes away. If you are looking for life insurance that has extra benefits, like the ability to put tax-free money away in a retirement account, you should look into an MFTA life insurance policy. With MFTA life insurance, you have the opportunity to put away your earnings and strategically and effectively plan for your retirement using different money-saving methods. In the event of a death in the family, people are often startled by the decrease in income. To help with this loss of money, not only will the death benefits of the life insurance kick in, but the earnings that you decided to put away over time will help prevent you from having to take money away from your 401(k) or social security checks. There are various strategies on how you can use MFTA life insurance and the insurance proceeds—which the IRS considers as part of your income—to aid in your retirement planning. These strategies include, but are not limited to:
- Building a retirement fund if the 401(k) and social security checks run low after a death in the family
- Using the insurance proceeds to make up for the loss of social security after a spouse dies
- Using the policy’s long-term care benefit, which allows you to use insurance proceeds to pay for long-term care without having to take money out of your 401(k)
- Taking advantage of tax-free withdrawals to save money for your future retirement
Understanding the Pros and Cons of MFTA Life Insurance
So far, we’ve talked about what it means to have MFTA life insurance, as well as how it can help you plan for retirement and prepare for a death in the family. However, this type of life insurance plan also has its downsides. Before you decide whether MFTA life insurance is for you, it’s important to realize that, just like all life insurance plans, it also has its drawbacks. In the chart below, we highlight some of the most important pros and cons of MFTA life insurance to consider. Below, we take a deeper look at them so that you can get a better understanding of the effects the pros and cons can have on you. Keep in mind that brokers who sell MFTA life insurance earn large commissions, which means they will try to push the positives of MFTA life insurance. While there are valid benefits to consider, if you refer to an agent, make sure that you receive an unbiased opinion on MFTA life insurance so that you can keep the best interests of you and your family close to heart.
- The earnings that you put into the account grow tax deferred
- Once you retire, you can take out the money through a loan that is potentially tax free
- This permanent life insurance plan lasts your entire life
- This type of policy gives you the opportunity to save money for your retirement
- Typical contracts do not allow you to take money out for at least 15 years
- These life insurance policies come with extremely high expenses, including penalty fees for taking money out early or not paying the premium
- You might not live long enough to reap the benefits of the tax breaks
- Standard, term life insurance products are typically much cheaper
What Benefits Does MFTA Life Insurance Offer?
As stated in the chart above, having an MFTA life insurance has many benefits, including receiving death benefits, in addition to putting tax-free money away for retirement. This permanent life insurance plan allows you to receive death benefits, as well as put money into an account without having to worry about taxes. It’s important to note that you don’t get a deduction for the money that you put into the MFTA life insurance contract, but the earnings do grow tax deferred. At retirement, if you take it out through a loan, you can potentially take it out tax free. This way, if you planned your retirement correctly, you will have more money to spend. Plus, once you pass away, your family and loved ones will be financially covered.
What Are the Downsides to MFTA Life Insurance?
As with any insurance policy, it’s important to read between the fine lines before purchasing an insurance product and signing a contract. Although MFTA life insurance policies have many benefits, including substantial tax breaks, there are also a few important downsides to them that you must consider. Most of the MFTA life insurance policies have high expenses built into them, which allows the brokers who sell them to receive high commissions. Some of these expenses include high premium payments and penalty fees. In fact, most of the MFTA life insurance policy contracts include a waiting 15-year period. In other words, you cannot take money out of the account for 15 years without having to pay substantial penalty fees. If you have an emergency of some sort and need to take money from your savings, these penalty fees make this process less convenient. Additionally, you may get hit with high penalty fees if you don’t make your premium payments or don’t keep a certain amount of money in the account. Lastly, before purchasing an MFTA life insurance policy, you should consider the fact that you may not be able to reap the benefits of the tax breaks, depending on your contract and how long you live.
Am I a Good Candidate for Maximum Funded Tax Advantage Life Insurance?
Whether or not you are a good candidate for MFTA life insurance depends on several factors, including your age, marriage status, family, retirement plans, and income. In an episode of the Hanson McClain’s Money Matters podcast, Scott Hanson and Pat McClain help a caller who asks if MFTA life insurance is a good idea for her and her husband, who are considered high-income earners. These are some of the important details about her and her spouse that the caller was asked to provide:
- Ages: 56 and 60
- Current retirement plans: 401(k), IRAs, stocks, and savings accounts
- Current retirement fund: approximately $1 million
- Current life insurance: standard term life insurance worth over $100,000
- Neither spouse will receive a pension after retirement
- $400,000 owed on a home worth $900,000 (interest rate of 3-4%)
- Yearly family income: $350,000 (fluctuates)
Here’s what Scott and Pat had to say about MFTA life insurance policies:
We like the concept behind them. Tax laws with life insurance are quite favorable, and the money you put into a tax life insurance contract, you don’t get any deduction for it, but any earnings grow tax deferred… It all sounds great on paper. Most of these policies that are sold have high expenses in them. It’s very rare that somebody actually uses these policies correctly and has them enforced for 30 or 40 years… and then dies with the loan in place to maximize the tax benefit. I’ve seen it used right twice. I’ve seen it used wrong most times.
After hearing the details, Scott and Pat were not worried about this couple’s retirement plans. Since they are high-income earners and already had about $1 million saved, this couple was already in good financial shape. Scott and Pat admitted while the caller and her spouse could benefit from MFTA life insurance, it wasn’t necessary by any means. The caller was encouraged to not proceed to consider MTFA life insurance, and instead, contact a retirement planner to help her and her spouse plan for retirement and organize their current savings. Scott and Pat also recommended that she and her spouse increase the coverage of their life insurance and extend it to a 10-year term. Additionally, to replace the income after retirement, they also insisted that the caller start saving much more money.
Listen to the full podcast here.
What Other Options Outside of MFTA Life Insurance Do I Have?
Whether or not you decide that MFTA life insurance is for you, it’s important to keep your options open and be as financially prepared for the future as possible. To do this, speak with a financial advisor or a retirement planner to make a decision based on you and your family’s needs. One of the best ways to plan for the future is to consider using multiple retirement tools, including 401(k)s, social security, annuities, low-cost stock funds, and taxable savings. This way, you have multiple plans that you and your family can rely on when an unexpected death in the family occurs.
Final Thoughts on MFTA Life Insurance: Is it Worth Purchasing?
Although MFTA life insurance has many benefits, sometimes it’s best just to maximize the benefits of a regular term life insurance product that will prepare for you and your family for the future. Depending on your situation, the substantial penalty fees, as well as the high premiums might take away from the value of MFTA life insurance. Outside of MFTA life insurance, there are plenty of ways to plan for your retirement, many of which will offer you tax breaks. If possible, it’s a good idea to start with contributing the max amount of money to your 401(k). To find out more options, you should speak with a fee-based financial advisor or retirement planner—one who doesn’t sell products. This will help you organize your financials. Another way to be smart about your life insurance is to compare rates of various insurance providers to make sure that you are getting the best deal. By clicking the link below and entering your zip code, BestInsurer will provide you with a list of affordable life insurance providers in your area. If you already have term life insurance, it doesn’t hurt to see what lower premiums you can find at other companies.