This article was originally publish on Kiplinger.

When it comes to retirement planning, most people think of traditional retirement savings vehicles like 401(k) plans, IRAs and Social Security benefits. Many times, we gloss over life insurance products, as they may not be an obvious solution for retirement income planning or tax minimization planning since they are designed primarily for the death benefit they offer.

However, select cash-value life insurance products, such as an indexed universal life (IUL) insurance policy, might also be a valuable tool for your retirement. This assumes, of course, that you are healthy enough to qualify for coverage both medically and perhaps financially and the policy costs support the expected benefits of the product. In this article, we'll explore how IULs can be used to supplement your retirement income.

Getting retirement income from an IUL

There are many ways to structure retirement income. Some people will manage their portfolios and pull some assets from non-qualified accounts while maintaining their taxable liability within a certain capital gains tax bracket to help minimize their taxes. Others will take income up to a certain point to help avoid jumping into the next income tax bracket. Regardless of your approach to retirement income, an IUL might act as a tax-free income buffer.

The idea is to fund an IUL and allow it the potential to grow for a period of time, ideally at least 10 years. If the policy has performed well, its cash value may be used as a source of income for when you want a little more but don’t want to trigger extra income taxes. Over time, if you experience positive arbitrage, you may end up with a little extra income to enjoy later in retirement. (I explained “positive arbitrage” in the first article of this series.) Or it could mean a little extra money to be passed tax-free to your beneficiaries.

Keep in mind, though, that policy loans and withdrawals will reduce available cash values and death benefits, possibly causing the policy to lapse or affecting any guarantees against lapse. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of the unrecovered cost basis will be subject to ordinary income tax.

I cannot emphasize this enough: Working with a financial adviser you trust is so important. IULs can be complicated. They must be designed, funded and managed correctly to maintain the policy's integrity. This article aims to share some potential strategies you may want to include in your retirement plan. There’s no such thing as a perfect investment, so please make sure that you do your homework and review any detriments before funding a policy.

Here are three ways to get retirement income from indexed universal life insurance:

1. IRA-to-IUL conversions

Converting a traditional IRA to a Roth IRA is a common tax minimization strategy that can lead to tax-efficient income later in your retirement. There are three ways to do a conversion. In the first, you move your IRA funds into a Roth IRA and pay the taxes on the amount at current income tax rates.

Then you have the backdoor Roth IRA. If you earn over a certain amount of income, you may not be able to contribute directly to a Roth IRA. In that case, you can contribute to a traditional IRA to get any income tax deduction you may qualify for and then convert those assets to a Roth IRA at a later date. There are contribution limits for traditional IRAs, but there are no limits on how much you can convert from an IRA to a Roth IRA.

The third option is what’s often called the mega backdoor Roth. This is a conversion that typically happens within your 401(k). Some plans may not allow this conversion, so make sure to check with your plan administrator for details.

Now, let’s discuss a different way to strategically move pre-tax assets into tax-free accounts, specifically the IUL. This involves slowly withdrawing funds from your 401(k) plan or traditional IRA account as distributions and using them to pay the premiums on a permanent life insurance policy. Please note that once the funds are withdrawn to go into the IUL, they will be subject to income tax because they would qualify as a distribution.

That begs the question, “Why would someone want to pay taxes when all they are doing is moving funds from a pre-tax account into an after-tax account that potentially has some tax-free advantages?” The idea is that if we fund the policy over several years and it performs well, you may be able to experience positive arbitrage and potentially earn back some of what you paid in taxes.

For example, let’s say in the first year, you take $10,000 of IRA funds and place them into an IUL. Due to possible liquidity constraints in the IUL, the taxes from the first distribution out of your pre-tax account into the IUL would probably need to be paid out of pocket. That means this strategy probably won’t make sense until you are age 59½, since pre-tax distributions before that age would be subject to an additional 10% penalty. Let’s keep going.

Starting in the second year and on, when you pay the additional premiums, say $10,000 each year for the next five to 10 years, assuming the policy does well, it may make sense to pay the taxes caused by the pre-tax distribution by taking a loan out of the policy, if the policy has enough cash value. As mentioned in the first article, the policy has the potential to grow based on the gross premium amount, not the net loan amount, giving the policy a chance to experience positive arbitrage and possibly earn back some of what you paid in taxes.

Another potential strategy might include placing pre-tax funds into a fixed or fixed indexed annuity or CD, and structuring the product in such a way that the assets have growth potential while structuring distributions from the annuity each year to pay premiums on the life insurance policy. These distributions will be taxable when taken out of the IRA annuity and, again, generally shouldn’t be taken until after age 59½ to avoid the 10% penalty. This would allow all the funds to have growth potential and principal protection while methodically funding the IUL to achieve the IRA-to-IUL conversion strategy.

Pension hedge against potential income tax increases

This retirement income strategy is admittedly the riskier strategy among the three. Its purpose is to be a potential hedge against higher tax rates in the future. If you have a pension or plan on taking income from a pre-tax annuitized income stream, then as taxes go up, your ability to afford your lifestyle might go down. You can’t not pay your taxes, so what do you do?

This strategy’s success rate depends on time and potential performance, which is not guaranteed. For example, ideally, you’d want to fund an IUL with after-tax funds for at least five years and then let it grow for at least another five years. You’ll need to ensure you have the right death benefit to cover your legacy needs while keeping the internal cost of insurance fees as low as possible. Note that any additional riders that may increase the cost of insurance may defeat the strategy's purpose altogether.

If the policy is properly set up and funded and has successful growth, achieving positive arbitrage, you may be able to help offset the income taxes due on your pension payments by using tax-free loans from the IUL.

Will your policy make enough to fully cover the taxes on your pension payments? Probably not. In fact, an IUL typically guarantees an interest rate of 0% to 0.1% at best, so in years when the selected index does not provide any interest, you will need to come up with the money out of pocket to cover the taxes and potentially the loan interest on the IUL. That may be from the pension income that year, or it may be from additional policy loans. It depends on what’s going on with the policy and the underlying index. Remember, this is a strategy to help hedge against tax increases. It is not an absolute or a guarantee of success.

On the flip side, if taxes don’t go up and you don’t use the policy to hedge against rising tax rates, you can still use the IUL for tax-free income during retirement and pass anything left over to your beneficiaries tax-free. If nothing else, it could act as a utility part of your overall retirement plan.

Closing thoughts

Indexed universal life insurance not only provides a crucial death benefit to your beneficiaries, but can also be a valuable tool for retirement income planning. However, it is important to remember there’s no such thing as a perfect investment or product. They all have their benefits, costs and limitations. Working with a financial adviser and a CPA or enrolled agent can help you determine if an IUL might be a good fit for you.