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Estate Bond
As investors near retirement, they often transition their assets into fixed-income investments to reduce risk. However, this approach can result in increased tax liabilities and lower returns, which may not be optimal. Additionally, some retirees hesitate to use their savings freely, concerned about preserving an inheritance for their children. The Estate Bond strategy offers a solution by reallocating excess funds from taxable investments into a tax-exempt life insurance policy. This allows the policy’s cash value to grow on a tax-deferred basis, potentially enhancing the death benefit while minimizing taxes during the investor’s lifetime.
How the Estate Bond Works and Its Benefits
The Estate Bond strategy involves redirecting a set amount each year from taxable savings into a life insurance policy, effectively replacing one investment with another.
The policy’s cash value grows on a tax-deferred basis, increasing the potential insurance payout at death. Since the death benefit is received tax-free by beneficiaries, it serves as a long-term tax shelter, ensuring more wealth is passed on while minimizing taxes during the investor’s lifetime.
For example, Robert and Sarah contributed $30,000 annually for 20 years into a Joint Second-to-Die Participating Whole Life policy. Their initial death benefit of $892,078 grew to $2,160,257 over 30 years. Compared to traditional fixed-income investments, this approach offers notable tax savings, greater returns, and additional advantages such as protection from probate fees (where applicable) and creditor claims.
This strategy is particularly beneficial for financially secure individuals over 45 in good health who have surplus funds, providing a tax-efficient way to grow and transfer wealth.