FAQ – 403(b)/457 Costs and Surrender fees

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My sister-in-law is trying to sell me “tax-free retirement life insurance.” What can you tell me about this investment?

What your sister-in-law may be describing is the strategy of paying into a cash-value whole life or universal life insurance policy, and then taking some distributions from the cash value while you are still alive. However, most withdrawals made from a whole-life policy during your lifetime are not “tax-free,” and in most cases, the premiums you pay for the policy are not excluded from your income, either. And unless you have a policy for many years that has accumulated a lot of cash value, it is unlikely you would be able to withdraw enough money for a sufficient retirement income stream. You may be better off buying an inexpensive term life insurance policy just for the death benefit, and using your 403(b) or 457 plan to accumulate money for retirement. If you would prefer to pay tax on your income now, rather than at the time you draw on your account in retirement, consider a Roth 403(b) or Roth 457 if offered by your district. Roth plans provide tax-free retirement income if certain requirements are met. You can read more about Roth plans here.

It may also be a good idea to talk with a fee-only financial planner who gets no commission from selling life insurance to see what mix of retirement savings and life insurance is appropriate for you.

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