Life Insurance In Retirement Planning
A PROPERLY DESIGNED LIFE INSURANCE POLICY CAN PROVIDE:
Income tax-free death benefit protection
Tax advantaged cash value growth potential
Supplemental retirement cash flow, through tax advantaged withdrawals and/or loans
Where does Cash Value Life Insurance fit?
Clients who need a retirement vehicle with downside protection
High income individuals looking to minimize taxation on earnings
For those who have maximized funding on qualified/non-qualified plans
An Insurance Solution
Death benefit protection during the accumulation years
Accessible cash value during retirement years
Life insurance becomes an income producing asset in the retirement portfolio
How it Works
Apply for a permanent life insurance policy using Indexed Universal Life or Variable Universal Life
Based on cash value performance, the policy will grow on a tax-deferred basis
Distributions can be withdrawn/loaned for any purpose
Additional Benefits Created
Provide additional income to pay for your childs college expenses
Help supplement a gap in retirement before social security begins
Create a steady cash flow after life expectancy once all other assets have been depleted
Listed below are the advantages of using cash value life insurance in everyday retirement planning
S For Retirement Planning
- Determine current and future expenses
Chalk out the current and future needs and determine the associated expenses. Remember, the need for medical assistance increases as we age. So, total healthcare expenditure as a percentage of total income will increase, precipitating the need to set aside an amount of money towards medical expenses.
- Assess current and future income
Ascertain the amount of money that can be allocated from the current incomes towards retirement planning. Additionally, consider future resources like income from part-time employment.
- Evaluate assets and current investments
Evaluate the current investment portfolio and determine the potential income that it can generate during the retirement years.
- Arrive at the retirement need gap
This is the difference between the amount of money required to lead a comfortable retired life and the amount of money currently available to meet this need. The retirement need gap gives a clearer purpose to retirement planning by creating a measurable goal.
Inheriting The Death Benefit
As long as its paid in a lump sum, the death benefit passes to your beneficiaries tax-free after you die. You can designate portions of your policy to any of your loved ones who might need financial support when youre gone. That could be your parents, your children, or loved ones who might need specialized care into adulthood.
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Have Your Debt Levels Dependents Or Other Priorities Changed
Many consumers purchase life insurance to offer financial protection to young family members, often selecting a policy that can help survivors pay off a mortgage or cover future college tuition bills. Decades later, the mortgage may be paid off , and the kids long finished with their degrees.
If youve also managed to build up your assets during that period, with 401 contributions and other savings, or if youve received an inheritance, you may no longer believe you need to carry the insurance you originally purchased. If you have a term life policy that was purchased for a specific time period , this might be a time to review both the coverage amount and time remaining on the policy. On the other hand, if youve taken on additional debt or are concerned that surviving loved ones might struggle financially after your death, it may make sense to hold onto an existing policy. Also, if you have purchased a policy with accumulating cash value, you may be pleasantly surprised by the many ways that policy can be an asset to your retirement.
In any case, this is a great time to review what you have and how you may be able to use the existing coverage and policy features for your retirement.
Is Whole Life Insurance Better Than A 401k
The cash value can be a way to supplement distributions from your 401K and provide financial support for your family in case of your death. However, even the best life insurance companies will not claim these policies should be relied on for most of your retirement income. Rather, a whole life policy can complement your 401K and other investments that depend on the market, potentially allowing you to take more risk with investments that have the potential for higher returns.The returns in 401Ks and IRAs typically fluctuate which can be good or bad depending on the market. A whole life policy’s guaranteed cash value provides extra stability to help get you through downturns in the market.
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Is A Life Insurance Retirement Plan Right For Me
Life Insurance Retirement Plans, like all financial tools, arent a one-size-fits-all strategy. Your unique financial situation and goals ultimately determine which wealth strategy is right for your needs. LIRPs are best suited for individuals who are financially responsible and want to take a more active role in their retirement planning.
High-income individuals who max out their retirement contributions and want to save even more are great candidates for LIRPs. The lack of annual contribution limits with the addition of several tax advantages and the ability to infinitely bank are ideal for wealthy families and aggressive savers.
Anyone who is planning on retiring early may also want to seriously consider a LIRP, as there are no penalties for accessing your retirement funds before age 59 ½.
Because LIRPs are whole life insurance policies, you must be able to qualify for life insurance in order to utilize this retirement strategy. The younger you start, the more likely youll be able to qualify for insurance and lock in a lower premiumbut its possible to add a LIRP to your portfolio even if youre already in retirement or approaching retirement.
Life Insurance Benefits Just For Retirees
If you were covered under the VRS Group Life Insurance Program as a member, some benefits continue into retirement, or if you are eligible to retire but defer retirement. Your coverage will end if you do not meet the age and service requirements for retirement or you take a refund of your member contributions and interest.
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Feasibility Of Life Insurance As A Retirement Plan
You probably have or will have a life insurance policy anyway, so one that doubles as a retirement plan might seem too good to be true. In a way, it might be. Almost no one can rely solely on life insurance for retirement youll still need other savings such as an individual retirement account or 401.
Additionally, investing in a LIRP might not be worth it if youre below a certain income level. Because using life insurance as a retirement plan offers the same tax advantages as an IRA or 401, the fact that life insurance lacks a maximum yearly investment is the main draw.
A Roth IRA limits you to contributions of $6,000 dollars a year$7,000 if youre over the age of 50 . A 401 limits you to $19,500 dollars a year. Assuming you have a 401, that means you can invest $1,625 dollars a month in it.
The median household income of an American family is $5,264 dollars a month. Even without counting highly variable childcare expenses and student loan or credit card debt repayment, $4,140 dollars of that income is spent immediately. The average American family is left with $1,124 dollars to save for the future, use if theres an emergency, or put toward retirement.
Inflation Hurts Your Future Purchasing Power
Youve heard people say, a dollar doesnt go as far as it used to,theyre talking about inflation and the purchasing power of money.
A dollar bought more in 2001 than 2021. In other words, it had more purchasing power. Lets say that in 2001, you went to the grocery store and spent $100 to fill your basket. In 2021, it would have cost you $143.52 to fill your basket with the same items.1
Inflation is stated as an annual rate. To show you how much inflation can change from year to year, between 2001 and 2021, annual inflation rates ranged between 0.3% and 3.4%–or an average of almost 1.9% per year. That doesnt sound like so much, but over 20 years, inflation increased your $100 of groceries by more than 43%.
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Will I Need A Source Of Emergency Funds
Its tough to know what unexpected financial needs might pop up during your retirement years. Most types of permanent life insurance policies include the cash value feature, which may be used as a source of emergency savings that you can access while youre still alive.
You may be able to take out a loan from the cash value in your policy¹. If, for instance, you face a medical crisis that your health insurance doesnt fully cover, you could borrow from your cash value to help pay your expenses. Having a source of emergency funds may be helpful when youre on a fixed income. Wondering which type of life insurance policy could help you meet your specific financial goals once you retire? Your life insurance provider can help you decide.
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Financial Tips For Retirement Planning
The five steps of retirement planning3Retirement planning has several steps. The end goal is to have enough money to quit working and do whatever you want. Our aim with this retirement planning guide is to help you achieve that goal.
Step 1: Know when to start retirement planning.The earlier you start planning, the more time your money has to grow. That said, its never too late to start retirement planning. Even if you havent started saving for retirement, dont feel as if your ship has sailed. Every dollar you save now will be much appreciated later. Strategically invest, and youll begin to catch up.
Step 2: Figure out how much money you need to retire.The amount of money you need to retire is a function of your current income and expensesand how you think those expenses will change in retirement. The typical advice is to replace 70% to 90% of your annual pre-retirement income through savings and Social Security.
Step 3: Prioritize your financial goals.Generally, you should aim to save for retirement at the same time that you’re building your emergency fund, especially if your employer has a retirement plan that matches a portion of your contributions.
Step 4: Choose the best retirement plan for you.If you have a 401 or other employee retirement plan with matching dollars, consider starting there. If you dont have a workplace retirement plan, you can open your own traditional IRA or Roth retirement account.
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The Premium Will Always Stay The Same
Unlike term life insurance, which must be renewed after a set amount of time at a higher rate, the monthly premium does not go up once you take out your whole life insurance policy. That’s one reason it can be advantageous to take out a whole life insurance policy when you’re younger and healthier and insurance rates are lower.
How Do I Use Life Insurance To Fund My Retirement
When most people think of life insurance today, they think of term life insurance. Term life insurances only purpose is to provide a lump sum of money to a loved one in the event of an untimely death. But its not the only kind of life insurance, nor is a death benefit the only reason to buy life insurance.
Whole life insurance, which insures you for the entirety of your life , features a cash value component. Similar to a high-interest savings account, you can accumulate wealth inside of your whole life insurance policy and use your cash value to pay for a variety of expenses, including retirement.
How your whole life insurance policy is structured will greatly affect how much cash value you build up inside your policy. Every time you pay your policy premium, a portion goes toward your cash value and a portion goes toward your death benefit. Whole life insurance often gets a bad reputation for slow growth because typical policies arent structured with retirement in mindtheyre structured to provide the largest death benefit possible to your beneficiary. However, when structured for living benefits like retirement, the cash value of your policy can rapidly increase.
There are two key components to a Life Insurance Retirement Plan necessary for meaningful growth:
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Permanent Life Insurance Vs 401 And Ira Plans
Williams says you should be maxing out your 401 before using permanent life insurance as an investment tool. Williams used the example of a person making $200,000 in salary who has maxed out their annual contributions to 401 and IRA accounts and have nowhere else to put money tax deferred so they use permanent life insurance.
The IRS limits contributions to an IRA to $6,000 per year for those age 49 and under and $7,000 per year for those 50 and over. It also limits
If you don’t have access to a qualified plan like an employer-sponsored retirement account, permanent life insurance is a good tool to save for retirement. But the cash value of your permanent life insurance policy shouldn’t be your entire retirement savings plan.
You Have A Decreasing Projected Financial Loss If
Your income will go away or decrease significantly after retirement. If that’s the case, you can likely project that your beneficiaries would experience much less of a financial loss if you were to die after you retire than if you were to die before retirement.
If you have a decreasing projected financial loss and you’ve invested well for your retirement years, term life insurance may be your best insurance policy for retirement planning. You can set the coverage to last only as long as you’d be providing an income or shorter. Funeral insurance can also make sense if you just want to make sure your final expenses are covered after you retire. These more affordable plans can help you avoid adding more costs in your retirement years when your income will decrease and your loved ones won’t be relying on you financially anyway.
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Saving For Retirement Or Accumulation Phase
- If you are looking at insurance coverage for life along with survival and maturity benefits, you can opt for whole life plans.
- In case you have a lower risk appetite and are looking for defined assurance and tax benefits, you can opt for endowment plans that provide either minimum guaranteed amounts and bonus or a fully-guaranteed amount .
- If you stand on the higher quadrant of the risk and return matrix, you can invest in ULIPs. These market linked plans let you save towards retirement while allowing you the luxury of drawing down, tax free for planned expenses, such as higher education for children, marriage expenses etc.
Key Benefits Of Life Insurance As A Retirement Tool
Life insurance offers benefits such as stability and protection, regular and guaranteed income during the retirement years and also, flexibility with facilities like top-ups.
The key benefits of using life insurance to build your retirement plan include:
- Long-term Product
Insurance is a long-term product that guarantees benefits for 25-30 years. It is the only instrument in your financial portfolio that provides for assured benefits and regular investments as insurance companies absorb the reinvestment risk in the long term.
- Inculcates Financial Discipline
Insurance inculcates financial discipline as it allows for regular investment. While everyone wants to secure their retirement phase, not everyone has the discipline to save.
- Suitable for Low Risk
Insurance is an ideal retirement planning instrument for individuals with low risk appetite and those who seek assured income. There are several options that provide either minimum guaranteed amounts plus bonus or a fully guaranteed amount.
- Versatility to Invest in the Stock Markets
Individuals with higher risk appetite can opt for market-linked plans such as unit linked insurance plans or ULIPs. These allow for savings in the earning phase and withdrawals in the non-earning or retirement phase.
Many insurance plans offer income options in non-earning years, such as ULIPs available till age 90 with withdrawals or whole life plans with money back built in or income plans where there is tax free income payable.
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Include Inflation In Your Budget For Today And Tomorrow
Although you cant predict how much prices will increase over time, you can safely expect that they will increase over time. Between 2001 and 2021, we experienced years of slow and moderate inflation. Then along came the pandemic and the many economic disruptions that accompanied it, and inflation in 2022 is very high. Take a look at your budget today to see where you may need to adjust your spending to account for the declining power of the dollar. And take a moment to make sure youre saving enough to afford the life you want in retirement.
The commentary in this article is for general information only and should not be considered legal, financial, or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation.
Taxes During Retirement Will Be Lower
You may be able to decrease the amount you withdraw from your retirement accounts if you use the cash value from your life insurance policy to help supplement your retirement income. During retirement, withdrawals from these accounts are usually taxed as regular earnings. Taking money both from your retirement accounts and your life insurance policy might help you stay in a lower tax bracket.
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