If there were a way to supplement your income when you retire, would you be willing to put your money into it now? What if those payouts could be received tax free?
A whole life insurance policy, paid up at age 65, can help you accomplish this and can also be a value-added component of asset allocation, says John Blatt, CLU, ChFC, CFBS, CLTC, a financial adviser with Skylight Financial Group.
“This is an area that is often overlooked,” says Blatt. “Most executives think that if they have stock option plans, or a group term policy with their employer, that they have enough life insurance. What they’re not considering is that there are living benefits to life insurance, as well as death benefits. They’re not aware of how personally owned life insurance can benefit them after retirement and give them more flexibility.”
Smart Business spoke with Blatt about how the right life insurance policy can provide a value-added component of asset allocation and can help ensure you have enough money after retirement.
What would you say to an executive who doesn’t think life insurance is a good investment?
Life insurance is not an investment. The money that you could accumulate within a life insurance policy isn’t going to compete with the higher rate of return you might have enjoyed in the market last year. But when used as a value-added component for asset allocation, life insurance is a way to be certain that there will be a source of money at some future point, whether as a death benefit or as a cash value that can be used in your lifetime to draw on if the return on your investments is down.
Unlike stock options or other investments you may have, you can know today with a decent degree of certainty what the policy is guaranteed to be worth when you retire.
Life insurance is not an end-all solution, but can be part of an overall comprehensive package that can give you flexibility and provide benefits during your lifetime. People primarily buy it for the death benefit protection, but it can be an important part of an overall retirement strategy.
How can life insurance help protect your assets after retirement?
Market returns over the last 10 years have been up and down, but overall, the S&P has been close to zero. When you retire and are making withdrawals from your retirement investments, and the market is choppy, that’s a concern. If the value of your investments is down and you’re taking money out, you’ll have less and less left in that investment account.
But, if you’ve done a good job with your life insurance, the cash in that life paid up at 65 policy is another place to draw money from if the markets are down. It gives you more flexibility because you’re not taking money out of investment accounts in a down market, allowing you to stay fully invested to give those accounts time to recover. This can be an effective part of your overall retirement strategy.
How do these policies work?
Most people buy life insurance policies with premiums payable to age 100. However, this policy is guaranteed paid up at age 65. You must pay all premiums in cash, up to age 65, and not withdraw any money until the policy is paid up.
Then you can begin drawing money out in retirement. Care should be taken when withdrawing in excess of basis in order to avoid adverse tax consequences or potentially lapsing the policy. Additionally, any withdrawals will reduce the policy’s cash value and death benefit.
Can you give an example of how a policy would benefit a retiree?
For example, if you buy the right kind of life insurance while you’re still working, you can position yourself so that not only do you not have to pay premiums when you’re retired, but you can utilize the cash in that policy as a source to supplement your income in volatile markets.
If you have $2 million in a retirement plan and the market goes down 40 percent like it did in 2009, then you only have $1.2 million. If you have to withdraw $100,000 a year to live, that could potentially only give you 12 years of income, unless the markets come back.
Alternatively, if you have $600,000 in life insurance cash-values and your retirement plan drops 40 percent, the $600,000 in life insurance cash values remains intact. In a year that your investments are down, you can draw from your life insurance and leave money in your investment accounts, allowing you to take advantage of a possible market rebound.
How is money withdrawn and are those withdrawals taxed?
It depends how you structure it. You don’t have to start withdrawing at age 65. Even though your policy is paid up at age 65, you might wait until you are 70 to take money out. If you just withdraw an amount equal to what you paid in premiums, you’re just getting your basis in that policy back, and that money would not be taxable because it is considered a return of basis. And because it is not taxable income, it would help control your tax bracket in retirement, which ultimately is a goal of financial planning.
John Blatt, CLU, ChFC, CFBS, CLTC, is a financial adviser with Skylight Financial Group. Reach him at [email protected] or (216) 592-7313. John Blatt is a registered representative of and offers securities, investment advisory and fee-based financial planning services through MML Investors Services, LLC. Member SIPC. Supervisory office: 1660 West 2nd Street, Suite 850, Cleveland, Ohio 44113-1454. Phone: (216) 621-5680. CRN201308-151034
