How Do 26(f) Retirement Programs Work?

26(f) Retirement Program Definition and Benefits

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A 26(f) retirement program is a retirement vehicle established as an investment plan in a whole life insurance policy. The 26(f) refers to U.S. Tax Code 26, Subtitle F. The premise of a 26(f) retirement plan is to build cash value in the insurance policy and use it for certain tax advantages. However, investors should use caution with such retirement vehicles.

26(f) Retirement Program Definition and Benefits

A 26(f) retirement program is a type of retirement savings vehicle that takes advantage of rules set forth in U.S. Tax Code 26, Subtitle F.

A recent application of a 26(f) retirement plan is for individuals to save and invest with an insurance product, such as a whole life insurance policy, where cash value or investment returns from mutual funds can accumulate over time on a tax-deferred basis.

Here are the primary rules and benefits to know about 26(f) retirement programs:

  • How 26(f) Retirement Plans Work: An individual can fund a life insurance policy with a single lump sum or with large premium payments over the course of several years. The ultimate goal of the 26(f) plan is to grow the policy's underlying cash value for the purpose (or option) of borrowing from it later in life, presumably in retirement.
  • 26(f) Retirement Plan Loan: Loans taken from 26(f) retirement programs are not considered taxable events, assuming the host insurance policy  remains in force and you are following the rules required by the contract. In some cases, the loan does not reduce the cash value of the insurance policy, allowing the underlying cash value to continue growing. Earnings from cash value in the policy can be used to make loan payments. Upon the policy holders death, the beneficiaries can receive the death benefit, less any outstanding loan balance owed at the time of death.
  • Primary 26(f) Retirement Program Benefit: Cash value in a whole life insurance policy can grow tax-deferred and death benefits go to your beneficiaries tax free. If done properly, loans from the policy would not trigger a taxable event.

Keep in mind that rules and benefits of 26(f) retirement programs are subject to the guidelines set forth in the underlying insurance policy's contract.

Some whole life insurance products, such as Universal Life and Variable Universal Life may have different rules and pricing than conventional whole life plans. 

Cautions About Using 26(f) Retirement Programs

The 26(f) retirement program has recently been a heavily marketed product to sell tax-deferred growth of cash value and related loans for individuals saving for retirement. In 2017, some insurance-based advisers appear to have used the repeal of the "fiduciary rule" as a scare tactic to entice individuals to buy insurance policies.

The general consensus among experts in the personal finance industry is that these benefits can be obtained without using a 26(f) retirement program. For example, tax-deferred growth with cash value in a whole life policy is inherent in the policy itself and not purely a benefit that can only be obtained through a 26(f) retirement program.

Furthermore, individuals can build wealth more effectively in most cases by purchasing a term life insurance policy, which is less expensive than a whole life policy, and invest the difference in savings in their own investment account with diversifies investments, such as mutual funds. Tax-deferred growth can be obtained in a traditional IRA, Roth IRA, or 401(k) plan.

Whole life policy premiums can be up to 10 times higher than term life policies.

The bottom line is that retirement savings, insurance, and investing are all areas of personal finance that are unique to each individual. In most cases, financial products that cover all three of those personal finance areas into one package should be questioned before purchasing.

For more information on comparing the benefits of life insurance types, see our article on term life vs whole life insurance.  

Disclaimer: The information on this site is provided for discussion purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.