How to Leverage Life Insurance for Retirement: A Financial Strategy Guide
One of the simple realities of being an adult is planning for retirement and protecting your family against loss. Do you dream of the day when you can leave your current job and be done for good? With proper planning and the right financial tools you can spend your days free from the work hassles and financial stressors that have been with you for most of your life.
If you've been planning for retirement or have worked with a conventional financial planner you know it takes some serious calculations, savings, and compounding of your money just to hope you will have enough money when you need it most. The conventional financial and retirement planning does not account for many of the unknowns and risks that could devastate your finances. For example do you think it is possible to KNOW with certainty what your exact risk is with future taxes, future market returns, volatility, sequence of returns, or any other unknowns that could severly impact your finances like long-term care or out of pocket medical costs, or even how long you live? How could anyone know these things before they have happened? No one can know these things or tell you with certainty what these future risks will actually be so they end up making a projection instead. Yes there are many tools and even past data that can help inform projections and even provide probability statistics, but at the end of the day when you deal with uncertainty it is a projection or in other words a hope.
The good news is that there is a better way. Your financial plan doesn’t have to be a hopeful projection or even a conservative guess. Instead of saving and investing with uncertainty, it is possible with the right knowledge and understanding to use financial tools that remove many of the unknowns and risks, while replacing them with certainty. Have you considered life insurance for retirement or as part of your financial and estate planning? Not only do you get the protection you want for your family if you die, but you also get some real advantages as part of your retirement planning too. Read on to learn about how life insurance in retirement can benefit you.
Life Insurance Retirement Plan
A life insurance retirement plan (LIRP) is a life insurance policy that includes many retirement benefits too. If you've researched life insurance, you know it comes in a few forms, two of which are term and whole life. While term insurance pays death benefits, it's a little like renting versus buying a house. You get what you need in the form of death benefit protection but you don't grow your money.
A whole life insurance policy (LIRP), also known as a cash value policy, gets you a death benefit, but it also allows you to grow your money tax-deferred. If you use the policy correctly you can also take tax-free distributions. It can give you some long term health care benefits too.
How Does a LIRP Work?
When you purchase a whole life insurance policy you first decide on the death benefit amount. You pay your premiums but you will also pay an additional amount which works like an asset and can grow your money. So, over the course of your life, you not only have the protection of the death benefits, you have another tax-efficient, safe, and liquid vehicle to grow your money.
Benefits of Overfunding
This type of life insurance allows you to invest more money than just the premiums. Many choose to overfund their cash value policy. So, they put additional funds into the policy knowing the money can sit in the policy, grow and be tax-deferred. The great news about overfunding your cash value life insurance policy is that it doesn't have limits on how much you can put into it. Other retirement vehicles, like an IRA or a 401K, have limits on how much you can put into them. Once you are maxed out on those, that's it. This is not the case with a whole life policy. Some even choose to overfund their policies and use them like a bank for recapturing some or all of their money spent on things like business expenses, college for their kids, cars, or houses.
4% Rule
Many investment specialists recommend that retirees follow the basic 4% rule. This rule says that once retired, you pull out about 4% of the retirement savings per year from investments. The issue with this rule is that it is not a guarantee, it is another projection based on past performance data. If it happens to be a year where the economy is struggling and your other investments are down, you might not want to pull as much money from those accounts. Additionally, as discussed previously there may be unforeseen expenses that must be paid during down market years eroding a hopeful financial plan even more. On the other hand with a properly funded whole life insurance plan you could know today what you could safely withdraw from that account in your retirement years both tax-free and stress-free, because your money is guaranteed to increase every year regardless of what the market does today or in the future. You could use the policy as your sole retirement plan or as a supplemental income plan during those down market years or to offset unforeseen expenses.
Retirement Accounts
You purchase a cash value policy so you get the death benefits and the investment-like opportunity. Yet, as a smart investor and retirement planner, you may still want to take advantage of other retirement investing. If your employer offers a 401K match, you may want to take advantage of it. This allows you to invest right from your paycheck reducing your current tax obligations today while getting a free 100% return from your employer up to the match of course. An individual retirement account (IRA) works in much the same way but is set up by you, has different contribution limits, and does not include any matching contributions. Even with these seemingly good benefits, these plans are not for everyone. There are rules and restrictions on the use of your money that should be well understood before investing in them and taxes on these accounts will be paid at your ordinary income-tax rate upon withdraw (whatever that rate may be in the future).
Asset Allocation
When interest rates are at an all-time low, bonds and CD's might not be the best choice. People planning for retirement still need a safe place to put their money. This is especially true if you have maxed out the value on what you can invest in a 401K and IRA account.
Putting your money into a cash value life insurance policy keeps it safe, where it can still grow over time.
There are many serious tax benefits to consider too. These include:
· Tax-deferred growth
· Tax-free cash flow
· Tax-free death benefit
Many people using this type of plan include it as part of their estate planning and retirement portfolio because of the many tax benefits.
High-Income Earners
Cash value life insurance is also a great choice for high-income earners. They have more money to put away for retirement and often want to save more. Unfortunately, the 401K and IRA limits become prohibitive for them. As a high-income earner they may have more money than will be allowed to contribute those types of retirement investments or them may not wish to take-on as much risk. The real advantage of a cash value policy is that it doesn't have those same limits and it is much safer. So, you can overfund the policy as much as you want, all tax-deferred. Then later in retirement, it becomes a source of cash or income.
Death Benefits and Long Term Care
The most obvious reason to buy life insurance is to protect your family in the event of your death. It provides financial security when you are not able to continue to do so. Don't forget that on top of the tax-free death benefit, the cash value whole life policy continues to offer living benefits along the way. Some of the living benefits include the investment-like liquid savings vehicle. In addition, many whole life policies offer accelerated death benefits if you become terminally ill. So if you are sick and the prognosis is not good, you can accelerate your policy to get benefits you might need for care. Depending on your State and Insurer you can also get long-term care benefits included in a whole life policy to utilize a portion of the death benefit to cover tong-term care costs.
Using Life Insurance for Retirement
If you are interested in learning about life insurance for retirement and its many benefits, we can help. Learn how you can plan for retirement and give your family the sense of security it needs whether you die prematurely or live a long happy life. Contact us today for more information about getting started with a life insurance policy that can help you now and in the future.