Permanent Life Insurance in Retirement Planning

Why should you consider Whole Life Insurance in retirement planning? Simple, life insurance can help.

Most folks are under the impression that once your kids grow up and leave the nest that’s finally been paid for, you won’t really need life insurance but you can actually use permanent life insurance for retirement planning.

This might be true if you leave enough liquid assets behind to cover final expenses like funeral and burial costs, unpaid medical bills, and nursing home expenses that weren’t covered by health insurance.

The problem is, however, that as you approach retirement age many of us typically begin to have concerns about the tax impact on our retirement plan that we’ve diligently invested in.

Let’s face it, with the US debt level at about $26 trillion; do you honestly believe your taxes will be less than they are today?

Wouldn’t it be comforting to know that you can have a tax free retirement income stream that will not be impacted by the taxes the government will need to pay down the debt it created through bad budgeting and careless spending?

There is a legal way to leverage the tax code so that your retirement income will be tax-exempt. The strategy many people employ is called a LIRP (life insurance retirement plan) that is funded using Whole Life Insurance.

Whole Life Insurance can Help You Survive Retirement without Taking on Risk

Traditional investments like IRAs and 401(k)s are certainly worth investing in, but for many people, the constraints placed on these investment products by tax-hungry legislators cause retirement plans to fall short when you need them the most.

Although a 401(k) can help you accumulate wealth, there are caps on investing and your employers may or may not commit to a suitable match.

IRAs are so controlled by federal regulations that everything must work exactly as planned for investors to count on the income they’ll need when it’s time to start taking withdrawals.

And, traditional investment products come with certain risks and penalties that can severely impact future earnings if life events cause you to withdraw funds earlier than expected.

Think about it. What happens when the market falls apart several times between now and retirement? What happens if you need to withdraw funds and thus interrupt the compounding of the interest you earn? What happens if the government simply changes the rules? That’s called risk. And the risk can be mitigated by using permanent life insurance.

Why Permanent Life Insurance for Retirement Planning?

When your retirement plan is a LIRP, the risk (costs) of down markets, life events, and critical illnesses are mitigated.

Since the interest rate earned in a Whole Life insurance policy is guaranteed by the insurer, there’s no reason to worry about your cash value being impacted by down markets during your investment years.

If you must respond financially to a life event, you can borrow against your cash value without interrupting the earnings from compounding interest.

If you become critically ill, your accelerated death benefit can be triggered so the insurer can advance you a large part of your death benefit to accommodate the medical costs associated with the illness.

And finally, none of these events will be taxable events.

Whole Life Insurance versus Indexed Universal Life

Often, when we first speak with prospective clients, they assume that Indexed Universal Life insurance is the best choice for a Life Insurance Retirement Plan. They also believe that the cash value in an IUL will increase faster than the cash value in a whole life policy

Typically this is the result of the old “devil in the details.” When most people learn about the Cap and Floor rate in an IUL they focus on the earnings rather than the distribution of the investment.

Yes, Whole Life Insurance policies are going to earn a lower interest rate year after year, but there will be no years when they will earn zero interest, and thus, the cash value will continue to increase. Not so with any term life insurance product.

For example, the S&P 500 and the NASDAQ have suffered losses several times in the last 20 years:

S&P 500 2000 – 2020

NASDAQ 2000 to 2020

Although an IUL policy didn’t lose money during these five bad years, they likely didn’t earn any either. This means that your 20-year investment plan became a 15-year investment plan. Yes, they earned good returns during the 15 good years but remember that interest was capped at probably 12 or 13 percent and there are no dividends credited to the policy. Moreover, the policy cash value was impacted by management fees being deducted from the account.

On the other hand, that old stodgy whole life insurance policy kept chugging along earning interest on the cash value no matter what happens in the market and unless the company seriously suffered during those 5 down years, a nice dividend was credited to the account as well.

How Your Whole Life Insurance Provides Tax-Exempt Income

This is how life insurance professionals can become heroes. Once you understand how simple it is to withdraw funds from your policy tax-exempt, the blinders come off and you completely understand why many CEOs of Fortune 500 companies use a LIRP as part of their retirement planning.

When it comes time to start taking annual withdrawals from your whole life insurance policy, you don’t actually withdraw it, you simply borrow against it.

When you borrow against your life insurance policy’s cash value account, the insurer is making the loan so therefore the earnings continue in your account and are not disrupted.

Since the funds are considered a loan rather than income by the IRS, there is no tax liability and the income stream (loans) will not impact your social security retirement benefits.

Yes, you’ll pay some interest on the loan but it will be much lower than any tax liability you would have if it were a traditional retirement account withdrawal. And don’t forget, if you happen to die unexpectedly, your life insurance policy contains a death benefit that will be paid to your beneficiary tax-exempt in most cases.

Also, since most Whole Life policies have an Accelerated Death Benefit which is typically built into the life insurance coverage, there will be money available if you end up in a nursing home or hospice facility because of a critical or chronic illness.

What could go wrong?

It will be incredibly important for you to pay attention to your annual statements from your insurance company and speak with your agent at least once a year. Doing so will make certain that your whole life insurance policy would never be in jeopardy of lapsing.

When you rely on the expertise of an experienced and reputable insurance broker and financial professional like Structured Wealth Strategies, you can have peace of mind knowing that your LIRP will be carefully monitored in order to avoid any chance of lapsing and to ensure that it does not become a modified endowment contract. After all, life insurance policies are our business. If you’re worried that you cannot afford a very large death benefit, buy term life insurance which is generally dirt cheap if you’re healthy.

Who should consider using Whole Life Insurance in Retirement Planning?

When thinking about buying whole life insurance, the younger you are, the better. That’s for two reasons: Number one, premiums will typically be lower. A good thing about whole life is that those premiums never increase. The second reason is that because you’ll be younger when you start your policy and have more time to let it grow, you can use the cash value as a supplement for retirement income.

Generally, you should consider getting life insurance by the time you’re 45 or earlier. That way, you still have time to build up cash and since you’ll likely be healthy you can be eligible for coverage at a much lower rate. But, even if you wait until your early fifties, you can still generate considerable wealth for retirement by choosing a policy with a paid-up by 65 payment schedule and taking all dividends as paid-up additions.

In Conclusion

Many policyholders are choosing to overfund their life insurance policies in order to accumulate enough cash value to supplement retirement. When you overfund a life insurance policy, the extra money accumulates tax-deferred in the cash value of the policy. But pay close attention to your annual statements because if an overfunded whole life policy exceeds the annual premium limit established by the IRS, your policy could become a modified endowment contract and subject to penalties and taxes on any withdrawals.

More about using Life Insurance to Save for Retirement

• Why Use Indexed Universal Life for Retirement Planning?
• LIRP – IUL or Whole Life?
• Achieve the Power of Zero