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Should You Use a 26f Investment Program?


For Americans who don’t have access to employer-sponsored retirement plans, such as a 401(k) or 403(b), there’s a retirement savings program known as the 26(f) investment program. The 26(f) plan is a retirement vehicle that’s based on an investment in a life insurance policy. Continue reading to learn more about the benefits of this investment program, how it works and why some retirement experts advise against them.

What Are 26(f) Investment Programs?

The “26(f)” part of its name refers to Title 26, Subtitle f of the U.S. Tax Code. This section of the tax code allows retirement plans to operate as investment vehicles. It also allows retirement plans to build cash value through these insurance policies. 26(f) plans can include whole or universal life insurance contracts. These policies can accumulate cash value or a return from an investment such as a mutual fund. The accumulated amount goes to a mutual fund, on a tax-deferred basis, over time.

To take advantage of this plan, individuals can fund a life insurance policy one of two ways. They can either put a lump sum payment down on the policy or make several large payments over the course of multiple years. The goal is to grow the insurance policy over time so that the investor can borrow against the policy in retirement. This allows them to capitalize on the tax-advantages of withdrawing from the cash value of the policy.

Benefits of 26(f) Investment Programs

Here's what you need to know about 26 f investment programs.

One of the benefits of a 26(f) plan is that loans taken from the retirement program or policy aren’t considered taxable. However, the tax exemption is contingent on the basis that the policyholder continues making premium payments and follows the insurance contract guidelines. Additionally, with some policies, loans will not reduce the cash value of the plan. This element allows the policy to continue to grow in value. Also, the policyholders can use the cash flow or the gained earnings from the policy to make loan payments.

The primary benefit of a 26(f) investment program is the cash value or mutual fund returns. These components of the insurance policy can grow, tax-deferred, and all beneficiaries will receive tax-free death benefits. It’s important to note that every insurance policy has different rules set forth by the insurer. Before you move forward with a 26(f) investment program take the time to understand the different rules and pricing structure of the insurance company you’re working with.

Key Considerations

Some financial professionals use the 26(f) investment program to market and sell investment products. They promote the tax-deferred cash value growth and related loans. All are aspects of this program that are appealing to pre-retirees who want to save for retirement. They also use the appeal of the fiduciary rule to tempt individuals into buying additional insurance contracts.

Many financial experts suggest that you can benefit from the tax-advantages without participating in the 26(f) investment program. For example, whole life insurance policies have tax-deferred growth on their cash value components. If a consumer decides to purchase a whole life policy they can take advantage of the tax benefits without participating in a 26(f) plan.

Alternative Plans

Some financial experts recommend purchasing a term life insurance policy instead. They suggest this route as an alternative to pouring all of your money into a whole insurance policy. Whole life insurance policies can be up to 10 times more expensive than term policies. With the remaining funds, you can build wealth for retirement. Using this strategy, policyholders can buy a less expensive insurance policy. They can then contribute their leftover cash toward other methods of retirement savings.

Utilizing these other savings vehicles allows individuals to diversify their investments while benefiting from the tax-advantages of other retirement accounts. Other retirement account options that offer tax advantages include traditional IRAs or 401(k) plans. This offers consumers other ways to put their money to good use.

The Bottom Line

Here's what you need to know about 26 f investment programs.

26(f) investment programs are just one of the many ways you can save for retirement. Before purchasing an insurance policy for the 26(f) investment program, make sure you understand the advantages and disadvantages. It’s also important to consider all of your retirement savings options and determine which one best suits your situation. Your employment status may determine a lot about your retirement account choices. Remember, you can always open more than one retirement account to maximize your savings.

Retirement Tips

  • If you need help saving for retirement, consider working with a financial advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
  • While it’s smart to have a retirement plan, you may also be eligible to receive a Social Security check from the government each month once you reach your full retirement age. Check out how much you can expect to get with a free Social Security calculator.

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