Spokane Journal of Business

Selling a business to create a retirement nest egg

Universal life policy can provide tax-free income

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If you are like many business owners or professionals with a practice, you envision using the proceeds from the sale of your business someday to fund your retirement. You also may be investing in stocks, bonds, mutual funds, IRAs, or real estate, but the sale of your business might be a large part of it.  What will you do with your nest egg? How will you live on it? Will you invest in the stock market, allocate it among a variety of asset allocations, and hope for the best that your diversification strategy works? Will you leave it all to chance and speculation, or would you rather have some guarantees? 

Will you leave it all in a savings account or CDs or a money market fund? You might have safety, but you sure won’t earn any interest either, right? Will you put that money into an annuity to generate an income? If you do, you might want to consider using a more modern annuity that still allows you to tap into the capital if you really need it; annuities of yesteryear were more restrictive and once an income was started, you really didn’t have any access. What about taxes? It may be a rhetorical question, but do you want to pay as little taxes as possible on your gains earned? 

One popular tool for some business owners to save for their retirement as a supplement to selling their business is a Roth IRA. They like the idea they will be able to pull out tax-free income at retirement. They like the Roth concept, because they feel there is a high likelihood tax rates will be much higher in the future in order to pay for our country’s debt, which is in the trillions. 

Some business owners would love to be able to sell their business someday, pay their capital gains, and take the proceeds and make one great big, single-pay dump into their Roth IRA, but of course this can’t be done, right? Not so fast.

One extremely powerful concept I share with my clients is universal life insurance policies. But first, here’s an important factor to consider with “qualified” retirement plans, such as 401(k)s, traditional IRAs, Roth IRAs, simplified employee pension plans (SEPs), and simple IRAs. They all have a “use it or lose it” rule that says you must make your contributions by April 15 to take advantage of it for a given tax year. Don’t do it, and it’s gone. There is no catch-up. If there were, maybe you could do that dump-in you want with the proceeds of your business. 

Now let’s talk about the fun part and look at the alternative strategy. With a properly designed indexed universal life insurance policy, or IUL for short, you can create a powerful retirement plan that combines a tax-free life-insurance death benefit to your loved ones, with the ability to draw a tax-free income stream, similar to a Roth IRA, and that is absolutely guaranteed against stock market losses. 

It’s noteworthy at this juncture, however, to point out that IULs are offered only through “legal reserve,” insurance companies that are required by law to maintain statutory reserves to back up their guarantees against market losses. The full details on this are fodder for a future article. 

The part I want to concentrate on for now is the carryover. Unlike qualified plans like 401(k)s and IRAs, IULs do have this carryover ability, and you can put a lot of money into them, either along the way or all at once when you sell your business or practice.

Let’s say your particular policy enables you to put in a maximum of $10,000 per month, but you’ve been focused on growing your business or practice and have been putting in only $1,000 per month. There is a difference of $9,000 per month. That number carries over. You don’t have to use it or lose it, like you do with IRAs or Roth IRAs.

In 20 years, you potentially would have up to $2.16 million in carryover of which you can take advantage. Then, you can sell your business, pay your capital gains, and deposit the proceeds into your IUL, which will be protected from all market losses. Now, that can pay you a tax-free income stream, and your life insurance death benefit will be reduced systematically over your lifetime as you take out more money for your retirement.

Additionally, as a business owner, you might like IULs because you can open one for yourself only, and you aren’t required to do so for your employees, the way you are with 401(k)s, SEPs, and simple IRAs. You also can be discriminatory and get IULs only for your best, key employees. There’s even a way for your business to receive cash value benefits tax free from the policy and pay them out as a tax-deductible expense. You can do the same thing with the death benefit, by having your business receive a tax-free death benefit on the employee’s life and paying out benefits to their family as a tax-deductible expense.

One downside is that because this is life insurance, you have to apply and be underwritten medically and try to get approved, something that isn’t necessary with regular retirement accounts like IRAs. Good health and insurability is nothing to take for granted, and the earlier you start when you are younger and healthier, the better. 

Plus, you will have more carryover years to accumulate and allow for a larger one time dump-in when you go to sell your business and deposit the proceeds. Policies, charges, and features do vary, and you want to do some comparing and work with someone you feel confident in who can help you to put together what makes the most sense for you. 

As the saying goes, “Where there’s a will, there’s a way.” A properly designed indexed universal life policy just might be your perfect solution for a “jumbo Roth IRA alternative.” 


Todd Radwick, president of Radwick Financial Group LLC, of Winthrop, Wash., is an insurance and financial adviser and 22-year veteran of the industry. He can be reached at 509-996-3425, or through his website at www.radwickfinancial.com.

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