How to Create Tax-Free Income in Retirement Using Life Insurance

When most people think of life insurance, they think of a payout to loved ones after they're gone. But did you know that certain life insurance products can be powerful tools for building tax-free income during retirement—while still offering financial protection for your family?

At New Sun Life Solutions Brokerage, we specialize in helping individuals and families unlock this little-known strategy. Here's how it works.

The Problem with Traditional Retirement Vehicles

Many Americans rely on traditional retirement accounts like 401(k)s and IRAs, which offer tax-deferred growth. But when it's time to withdraw funds in retirement, those distributions are fully taxable—and depending on your income, they can push you into a higher tax bracket.

Plus, 401(k)s are often tied to the performance of the stock market. That means your retirement income could fluctuate with market volatility—hardly the stress-free retirement most people dream of.

The Life Insurance Alternative: Indexed Universal Life (IUL)

An Indexed Universal Life (IUL) policy is a flexible, permanent life insurance product that allows your cash value to grow based on the performance of a stock market index (like the S&P 500)—but with no downside risk due to market loss.

Here’s how an IUL can work to provide tax-free income in retirement:

1. You contribute premium payments that exceed the cost of insurance (this is key).

2. The excess builds cash value, growing over time—linked to market performance with a floor (typically 0%), so you don’t lose money during downturns.

3. You access the money in retirement through tax-free policy loans, which don’t count as taxable income.

That means you could potentially receive tens of thousands of dollars per year—tax-free—for life.

Real-Life Example

We recently worked with a client in her early 40s who had an underperforming 401(k). After reviewing her goals and risk tolerance, we helped her reposition her contributions into an IUL policy.

Her projected outcome?

Starting at age 65, she’ll receive $61,000 per year—completely tax-free—for the rest of her life, all while maintaining her life insurance coverage.

Why This Strategy Works

✅ Tax-Free Income – Policy loans from IULs are not taxable under current IRS rules.

✅ Market-Linked Growth with No Risk of Loss – Your cash value grows based on a market index, but is protected from market downturns.

✅ No Required Minimum Distributions (RMDs) – Unlike IRAs and 401(k)s.

✅ Flexibility – Access your funds when you need them, with no age restrictions or penalties.

✅ Legacy Protection – You still maintain a death benefit for your loved ones.

Important Considerations

While IULs are a powerful tool, they aren’t a fit for everyone. They work best when:

• You plan to contribute consistently over time

• You’re looking for long-term benefits, not short-term gains

• You work with an experienced advisor to structure the policy correctly

Improperly designed policies may not perform as expected—so working with a knowledgeable, licensed professional is crucial.

Ready to Explore Tax-Free Retirement Options?

At New Sun Life Solutions Brokerage, we take a personalized, consultative approach to help you understand your options and choose the strategy that fits your unique goals. Whether you’re in your 30s, 40s, or 50s—it’s never too early (or too late) to start planning smarter.

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