Barry and Adam wrote and published the book “Guided Retirement Income Planning” in November 2020 to create higher levels of financial literacy and to show a comprehensive and logical process for executing income planning in retirement. Since we believe that this subject matter is so important and relevant, we are going to roll out one chapter each month. While our approach and philosophy will remain consistent in every economic cycle, customization for each household will vary.
We want to emphasize that some of you are not close to retirement and it is never too early to plan. You may also have loved ones, friends, or colleagues that are in need of help. We would be pleased to send them a complimentary copy of our book. We simply hope to help as many people as possible. As we present these chapters, we invite you to circle back to us with any questions or concerns about the content and how it relates to you.
Please enjoy Chapter 19 below! If you missed any of the previous chapters, you can read them all on our blog here.
Your Partners at MGFS
The Different Roles of Life Insurance
“The basic purpose of life insurance is to create cash…nothing more or nothing less. Everything else confuses and complicates.” (Ben Feldman – legendary insurance agent)
The focal point of this section is to highlight the benefits of using life insurance policies in your retirement plan. We will not review specific companies or types of permanent insurance, as there are many. Life insurance can serve multiple roles in retirement. Permanent over term insurance is the most appropriate form of coverage as term premiums become prohibitively expensive later in retirement. It is necessary to account for such policies in your budget. As well, because there are so many uses of life insurance, you should work with your advisor.
If you have life insurance coverage provided by your employer, be aware that the coverage may terminate when you retire. If it is portable, it may help with legacy planning. Each policy needs to be assessed independently for pricing and suitability.
In a retirement plan, life insurance can mitigate risks associated with longevity, loss of spouse, health care, and long-term care. Depending on the objective, it can also be designed for emergency reserves, liquidity, tax-exempt income, and estate and legacy planning needs. Here are some design objectives:
- Spousal protection – For many households, required cash flow needs do not change significantly after the first death. The coverage can be income replacement for a spouse. This protection is most critical when there is an early death, couples that have a large age difference, or if there is a lack of adequate savings for retirement. Further, this insurance protects the surviving spouse against the loss of social security and potential pension benefits.
- Family protection – The benefit may serve to take care of children and the surviving spouse, or to create a legacy. It is also often used for multi-generational and mixed family planning.
- Life insurance with a focus on cash accumulation – Life insurance policies can be designed to maximize guarantees that usually result in lower premiums and cash values. Policies can also be designed to maximize cash accumulation. Such cash values grow tax-deferred and can be withdrawn tax-free as well. As stated earlier, the cash values may be used for emergencies, liquidity, and to supplement retirement income. We want to point out that life insurance accumulation products have really evolved over the years in a very positive way! Some products provide safety of principal with growth potential. If maximizing premiums for cash accumulation is your goal, then plan design is especially important to meet policy requirements.
- Personal bank – Using life insurance to “be your own bank” makes sense if you are concerned about government regulations or the reliability of banks in the future. It allows you to access cash values for business and retirement income needs, and is similar to life insurance with a focus on cash accumulation. For the right situation, both of these strategies offer a remarkable combination of safety, guarantees, flexibility, tax advantages, liquidity, and risk control.
- Special needs trust – To establish and fund a future sum of money to help take care of loved ones who are mentally or physically unable to take care of themselves. An estate-planning attorney will assist in the creation of the trust. The insurance policy insures that the trust will be funded properly at a future point in time.
- Irrevocable life insurance trust – This is strictly a legacy objective for larger estates to preserve wealth from one generation to another. A trust is formed outside of the estate and funded with life insurance. When created properly, the death benefit will not be included in the estate and thus not be subject to estate and income taxes. For many households, a last-to-die life insurance policy is used. This type of policy typically has lower overall premiums because they are based upon both insureds’ lives and are paid upon the death of the last surviving spouse.
- Charitable planning – For those with philanthropic legacy intentions, life insurance can effectively be used as leverage to make a much larger future charitable gift than by making smaller ongoing contributions.
- Life insurance with long-term care or chronic illness benefit riders – These products can serve multiple roles and in some cases have substantial cash values. Without getting technical, these policies can be designed for more or less long-term care or chronic illness benefits. The policy may be used for death benefits and/or long-term care needs while living.
- Pension maximization – When you choose a pension income option, there are times when it is better to elect a single life payment and buy a life insurance policy for the surviving spouse instead of a joint and survivor payment. There needs to be some serious number crunching here to see if this strategy makes financial sense. It varies case by case, but when it works, this is a great strategy!
- Creditor Protection – Depending on circumstances, life insurance can protect families and businesses against creditors and malpractice lawsuits.
The earlier the household can plan ahead, the greater likelihood of favorable insurability and lower premiums. And you guessed it…wait for it… implementing any of these life insurance strategies will require a trusted advisor.
The Lighter Side of Estate Planning Joke
An elderly gentleman who had had serious hearing problems for a number of years went to the doctor to be fitted for a hearing aid that would return his hearing to 100%.
The elderly gentleman went back for further tests a month later and the doctor said “Your hearing is perfect. Your family must be really pleased that you can hear again.”
To which the gentleman replied “Oh, I haven’t told my family yet. I just sit around and listen to the conversations. I’ve changed my will three times!”