Client Comments To Watch For This Strategy
Have clients that may benefit from using life insurance as part of a retirement plan? These are some comments to be on the lookout for to know that it could be a viable option:
I want to save more for retirement, but Ive contributed all I can into my Roth IRA/IRA/401.
Im worried tax rates will go up, and I wish there was a way to receive income without increasing my tax bracket.
I dont want all my retirement income subject to market risk and taxes.
Im worried about what happens to my nest egg when I die or need long-term care.
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Is Whole Life Insurance A Good Investment For Retirement
A LIRP isnt worth it for most people, but theres no one-size-fits-all approach to saving for retirement. The high cost of permanent policies nearly half of which are surrendered within 10 years for that very reason and the lower rates of return outweigh the benefits of having an additional retirement account for most people.
If you contribute the maximum amount to your retirement each year and dont want to put additional funds into a traditional post-tax investment account, then a LIRP might be worth exploring. The best alternative to a LIRP is buying a term life policy and maintaining a 401 or Roth IRA. Even if you regularly max out your retirement accounts, a standard post-tax investment account can deliver a higher return on your contributions. And when you no longer need life insurance coverage, its simpler to drop term coverage than it is to cancel a permanent policy.
What Makes Retirement Planning Essential
There are 4 key dynamics that should prompt everyone to think about retirement planning to become financially independent:
- 60 is the New 40
Gone are the days when the word death was a part of the lexicon when you turned 60. Improvement in medical science has increased the average life expectancy in India from 49.7 years in 1970-75 to 68.7 years in 2012-16. However, while life has increased, work-life has not. If retirement is not planned well, you could risk outliving your savings.
- Medical inflation
Do you remember the price of a thermometer 30 years ago? Maybe not, but you sure must anticipate and plan for a thermometers price 30 years hence. The point is that inflation in the health area prevention, diagnostics and treatment will all rise exponentially.
Several studies have pegged Indias medical inflation in the year 2019 in the range of 7% to 9%. The pandemic and the cost involved for prevention and cure is a latest example. Additionally, with advancing age, the medical expenses will also keep on increasing.
- Reduce dependencies
It is important to recognise that India is undergoing a transformation in its socio-economic fabric. Earlier children took care of the elders due to the prevalent incidence of joint family systems, common income source , etc. Today, individuals are increasingly yearning for a retirement period where they do not need to depend on family members for basic necessities.
- Desire to pursue passion projects in retirement
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How Do I Choose A Pension Plan
It is important to have enough money to ensure your financial freedom during your golden years. Basis your post-retirement dreams and goals, you may require the money either in the form of a lump sum, a regular income, or both. Understanding the below factors will help you choose the right pension plan that will best suit your requirements.
Importance Of Investing In A Savings Plan
An insurance product that can act/double up as an investmentplan can offer several benefits. Some of these have been discussed below:
- Financial stability:
Life can be uncertain at times. Situations may arise when one may lose their job, someone in the family suffers from a medical ailment, injury, etc, which results in a sabbatical from work or a decrease in income. Such situations dont take away the fact that you will still have to support your family. Besides recurring costs such as food, clothing, fuel, education of children, other household expenses, adverse situations may call for increased expenses. Saving investment plans can help in such conditions by providing you with financial stability in life. These plans offer guaranteed income, so you are never without a safety net, and you can feel secure in diverse situations.
- Life protection:
A life insurance savings plan has two components. The first is the savings component that lets you plan for different financial goals as well as emergencies, and the second is the life cover that protects your loved ones.
Any loss of life has its effect on a family. When a family loses an earning member, other family members can be left without financial cover. The loss of income can disrupt the lives of parents, siblings, spouse, children, or anyone dependent on the earning member for money. If you have loans, the responsibility to deal with creditors and repay your debt will also fall on your next of kin.
- Flexible options:
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Life Insurance Retirement Plan Loans
A life insurance policy can be a great way to help you save for retirement. With a fixed life insurance loan, you can borrow against your policy and use the money to help pay for things like retirement expenses or other bills. Index loans are another option that allows you to borrow against your policy and use the money to help pay for things like retirement expenses or other bills. With an index loan, it can still track the index even though the money is loaned out of the cash value.
Life Insurance Retirement Plans Explained
A life insurance retirement plan is a permanent or cash value life insurance policy funded over time to build up a substantial cash value by the time you retire. Unlike term life policies, permanent life insurance policies dont have a preset duration, and last as long as you make the payments. LIRPs can provide retirement savers with a supplemental source of income on top of their individual retirement account and retirement plan distributions after they stop working.
LIRPs lack some tax advantages that IRAs and qualified plans can provide, but they offer a few benefits that they cannot match. For example, there is no age requirement for certain types of distributions from a LIRP. IRAs and qualified plans will penalize you for any distributions taken before age 59 ½, barring exceptions. Furthermore, LIRPs can often guarantee the investors principal and interest unless the investor is contributing to a variable universal life insurance policy.
That guarantee, for those policies it applies to, means that the insurer has promised a minimum interest rate and that your cash value is protected against loss. Conversely, variable universal life insurance plans have non-guaranteed interest rates that fluctuate with underlying assets and the market. In simple terms, one protects against loss while the other offers potentially higher gains but does not protect against loss.
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Using Life Insurance For Retirement Income
While many retirees periodically withdraw a portion of their cash value to help supplement their retirement income, another strategy you may want to consider is to use the cash value that builds up in your policy to purchase an income annuity. Since an annuity returns the principal you invest with the annuity issuer, it can create a steady, dependable flow of income that you can count on in your retirement years. Either way, its important to make sure that your need for life insurance protection has changed, and that withdrawals can be a taxable if they are not done properly. Be sure to consult a financial professional or tax-expert before employing either strategy
How Does Insured Retirement Plan Work
Well, it works well :).
An insurance retirement plan is a tax beneficial strategy that takes advantage of two common tax benefits of life insurance: growth inside a policy is generally tax deferred, and secondly death benefits are not normally taxed.
IRPs use both of these benefits to create a compelling way to save for retirement. Importantly the IRP works best if your other tax advantages strategies are already maxed out . Those other strategies in most cases are better than an IRP, so we look at implementing an IRP only when those other strategies are already fully implemented.
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Lirps Are Too Expensive
Most financial advisors that are critical of permanent life insurance like to compare term vs whole life insurance to shock the reader into a state of disbelief.
They will compare a 35 year old male non-smoker with good health paying for $1 million dollars of insurance. The premiums are just over $1,400 for 20 year term insurance, and almost 10x that amount of whole life insurance.
But this comparison is not fair for a couple of reasons.
First, the comparison chooses the cheapest term insurance to the most expensive permanent insurance.
If the term was 30 years, the rates would be almost double, and if you choose a different kind of permanent insurance the rates would likely be closer to 5x or 7x that of term. But thats still a big difference!
True, but that brings us to the second reason this comparison is not fair.
In the example of the term premium, the premium is only paying for insurance, while with the whole life premium, a portion of the premium is going to cash value.
In other words, one has a savings component, the other doesnt. So its not an apples to apples comparison.
Further, the term may be less pricey early on, but consider what the term life premiums will be in 10, 20 or 30 years.
Now you want to renew your policy only to find out that your term life insurance premiums are what your cash value life insurance premiums were back when you chose the term vs permanent policy.
Paid-Up Additions
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.
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Retirement Income In Life And Replacement Income In Death
In life, your LIRP can be used as tax-free income via withdrawals up to your basis or you can borrow against your cash value. Having a steady stream of tax-free income from your policy is a great way to supplement your retirement income.
In death, the LIRP provides income protection in the event that you can no longer provide that retirement income for those you love. In the event of your death, the LIRP provides a tax-free death benefit to your beneficiaries.
Long Term Care
And if you have chosen the disability features within a LIRP, you can even provide for you spouse and family if you are permanently disabled, need long-term care or are terminally ill via long term care and chronic illness riders.
While the goal of a LIRP is to provide living benefits for you and your loved ones that last your entire lifetime, one of the key benefits is that it also provides death benefit protection if you die unexpectedly.
The peace of mind that comes from a LIRP is a great advantage, and its one reason why the LIRP is sometimes considered a self-completing retirement plan.
Life Insurance In A Qualified Retirement Plan
While life insurance can’t be owned in a simplified employee pension or IRA, IRS regulations allow them in some profit sharing and defined-benefit plans. These plans tend to be complex to administer and need to adhere to strict rules that require the life insurance only to be incidental to the retirement benefits provided by the plan.
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Why Ulips Make Good Retirement Plans
Since ULIPs are invested in the equity market, they yield higher returns compared to other retirement, pension, and investment plans such as FDs, pension schemes, bonds, and endowment policies. In addition, investing in Unit Linked Insurance Plans involves less risk, so you get the benefit of both security and excellent returns.
Factors To Consider While Buying Pension Plans
You are convinced that you need to buy a pension plan for a financially secure retirement. However, you are not sure how to get started and the various steps to take. Here are some major aspects about pension plans that you need to keep in mind before buying them.
- Determine retirement savings targetWhen you are saving for your retirement through regular in retirement plans, or in a pension plan or a pension scheme, you need to figure out the savings you require at retirement. This will help you figure out the regular investment you need to make in pension plans. Remember to take into account your retirement savings from other sources like provident fund. In this stage, also take into account the retirement income needs of your spouse and family members, such as a financial dependent member with special needs. If this sounds a little complex for you, take the help of online calculators or the help of a financial advisor with proven expertise.
- Start earlyTo have ample retirement savings, you need to buy the pension plan early in your work life. This will make sure you have ample time to make small investments so that you can save a large amount.
- Premium payment periodWhen buying a pension plan from a life insurance company, get a sense of the time till which you will need to make the premium payment. This will keep you informed about your financial commitments to the pension plan.
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The Lirp Provides Guarantees And Safety
In 2008 the stock market plunged almost 60% and millions of Americans lost a fortune of their hard-earned savings, to the tune of trillions of dollars.
In the months following the market collapse, people were looking for answers from their brokers and advisors.
But unfortunately for many, the answer was the tried and true these things happen stay the course itll all come back. AKA the buy and hope approach.
And thus far its true, the market has climbed back. But what about the lost decade of earnings?
For many Americans that had saved with traditional investment strategies, the crash in 2008 was enough to devastate their portfolios. Many saw more than 50% of their portfolio given back to the market in massive sell-offs.
And while its true that these Bear markets are typically followed by Bull markets, that isnt a solid encouragement for those that planned on retiring in 2009 or 2010.
A Guaranteed Floor
A LIRP provides a floor to your investment returns, also known as a guarantee. The guarantee means that you will never have a year in which you take a loss, and depending on your product choice and allocation you may be able to get a guarantee that youll never get less than 3 or 4%.
In order to get the guarantee and the safety that comes along with it, you will give up some of the big gains that come in the incredible bull market years.
Guaranteed Death Benefit
Who Needs Permanent Life Insurance
High-net-worth individuals â those with at least $1 million in liquid assets â often have permanent life insurance policies for tax benefits, education endowments for colleges and universities, and charitable gifts.
But you don’t need to be wealthy to get permanent life insurance. Think of permanent life insurance coverage like equity in a home. Start with a smaller death benefit if you can’t afford higher monthly premiums, and increase it over time.
Maria Roloff, a wealth advisor at Northwestern Mutual Insurance, recommends clients “blend insurance â some permanent and term lifeâ to fit in their budget allowing for maximum coverage.”
Williams said that people who no longer need a death benefit and whose adult children are independently wealthy can sell their permanent life insurance policies. Talk to a financial advisor, estate lawyer, and accountant to get customized life insurance for your needs and tax situation.
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This Sounds Great How Much Life Insurance Should I Buy
While each persons needs are different, its important to remember that this strategy is designed to provide supplemental retirement income and should therefore be considered a complementary piece of your retirement portfolio. Here again, a New York Life financial professional can provide some valuable insight and help determine your policy needs.
Benefits Of Investing In Life Insurance Savings Plans
India has been traditionally a country of savers. We have managed to spend less than our income and save the maximum possible amount out of regular income for securing our future. Sometimes, this has also meant postponement of current consumption for a better future. However, saving money is never as simple as just cutting back on expenses. Investing these savings wisely to deal with unexpected financial emergencies and to fulfil goals, such as buying a house, having a comfortable retirement, providing for yourself and your family, and more is extremely essential.
A savings plan can help you do this and can offer you guaranteed financial protection along with a life cover and help you live a stress-free and wholesome life.
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