By Adam Paoli
Over the last few years, news headlines have reminded us about the uncertainty of our financial future. Volatile markets, the demise of defined benefit plans and devalued real estate have affected many sources of income that Americans once counted on as they neared retirement. As if these changes weren’t threatening enough, Social Security reform is adding a new level of anxiety for retirees.
In this new retirement reality, uncertainty and fear are pervasive. People are looking for advice that will help them prepare for these challenges. The pairing of permanent life insurance with traditional investment planning is one option that can help provide a degree of certainty because of the guaranteed death benefit and cash value accumulation potential. Both are benefits that can be used to supplement and enhance retirement revenue streams.
Most people view life insurance as a product to be purchased when they have dependents to protect with a death benefit. They view it as a purchase that is necessary when they marry, have a family, or starta business as a means to help protect their income. It is not often considered to be a necessity in retirement planning, but it should be.
For years, those nearing retirement have been working hard and saving to build a nest egg for their future income. They are getting close to paying off a mortgage and they have completed their duties of supporting their children into adulthood. The time has come for them to focus solely on saving for their own future. Since they have declining liabilities and dependents, why should they consider purchasing life insurance at this juncture in their life?
Permanent life insurance can provide much-needed supplemental income between retirement and the onset of taking Social Security benefits. If structured properly, accumulated cash values can be accessed on an income tax-free basis and do not have age-based access restrictions like qualified retirement plans have.
Why should someone 60+ consider purchasing permanent life insurance?
· To spend down retirement assets and still leave a legacy. (This assumes the life insurance policy coverage remains in place until death of the insured.)
· To use the cash value to help pay for unexpected expenses in retirement.
· Business owners can use it as an estate equalization strategy, in which the children will receive an equal inheritance if the business will be left to one child.
· For wealthy clients, it can be used for estate planning purposes.
An approach that some may not consider – but perhaps could have more of an impact -- is to use permanent life insurance as part of an asset protection strategy in which the policy acts as a “permission slip” to spend down retirement assets. Many retirees planto take “income only”distributions from their current portfolios. Depending on market performance, longevity and actual income needs in retirement, many in the 60-plus age group are uncertain whether they will have enough remaining money to leave a legacy.
Permanent life insurance can help to combat these uncertainties and maximize retirement income by supplying a death benefit to leave a lasting legacy. The death benefit can offer some the flexibility to withdraw higher levels of retirement income from their investment accounts, with the knowledge they will leave a legacy through life insurance.
It should be noted that accessing policy cash values through loans or withdrawals will reduce the death benefit and cash value amounts, may be subject to surrender charges and, in some cases, additional payment of premium to avoid policy lapse.
Recently, I met with a successful physician who was interested in retiring over the next few years to spend more time with his ailing wife. He wasn’t sure if they had sufficient assets to maintain the standard of living they were currently enjoying. He also was determined to leave an inheritance for their only daughter, because he recognized that an inheritance he received many years before had a direct impact on his ability to pursue his own career aspirations.
Together, we reviewed his current retirement plan, which at the time included no life insurance. I then compared it to a plan that incorporated permanent life insurance. After considering several scenarios, my client was surprised to see how life insurance – a product he was told he no longer needed – could have such a powerful impact on his financial future. The couple now has the luxury to draw more than just investment income from their retirement assets because of the “asset protection plan” known as life insurance. They believe they are ready to enjoy the lifestyle to which they have grown accustomed, while guaranteeing a legacy for their daughter.
Although this client saw the value of incorporating a life insurance policy into his portfolio when he was in his mid-60s, it is even more beneficial to introduce the miracle of life insurance to younger generations. Purchasing a permanent life insurance policy at an early age can allow for lower premiums when the client is young and healthy. It also allows the client to build cash value with the policy over a longer period of time. Additionally, clients can tap into the cash value in their life insurance policy throughout their lifetime to supplement an income stream in between jobs or to help fund a large purchase, such as a down payment on a home.
Some financial professionals do not tend to spend a lot of time covering the importance of life insurance as a dynamic element of a sound financial plan. Unlike many other financial tools and investments, life insurance admittedly is not “sexy.” However, as financial professionals, it is our obligation to educate our clients about the possibilities life insurance has to offer throughout every life stage.
The transition from work to retirement is challenging, and the changes in our economy have not made that transition any easier. Financial professionals should take the time to understand how permanent life insurance should be the first and center part of a sound financial plan, which seeks to offer security and certainty to clients when they need it most.
Adam Paoli is a financial strategist with The Heartland Group in Chicago, Ill. Contact him at [email protected].