A Climbing Rope And A Permission Slip: Life Insurance and Retirement Planning

By Karl Kreunen

Retirement planning is hard. First, your clients need to focus on accumulating their assets, climbing to the peak of their financial mountain where they finally have saved enough money to retire. On the way up they, need to avoid the crevasse of overly optimistic returns and the rock fall of emergency cash needs.

After they’ve traveled to the top, they have to negotiate their way back down. That means having an income for their entire life – no matter how long that lasts. It means avoiding bad decisions when they face an avalanche of negative returns. It means vigilance, responsibility and access to the tools that can help. Whether climbing or descending from the financial mountain, permanent life insurance is an additional tool that is often overlooked.

The main purpose of life insurance is to ensure that the people we love have the life we planned for them, even if we’re not there to enjoy it, too. But life insurance can do far more than simply protect.

Many financial professionals see the value of a life insurance policy as part of a properly structured financial plan. They see the protection aspects and how life insurance can help supplement income. It can be the strong rope your clients need to get up and down their personal financial mountain, offering flexibility, protection and security.

Accumulation advantages

Like a good rope, life insurance can be used several ways when your client climbs the retirement mountain. Flexibility comes from life insurance’s accessibility features as well as its death benefit.

Bear in mind an important set of statistics: Among 30-year-olds, about 18 percent of men and 11 percent of women are projected to die prior to reaching age 65, according to Social Security Administration actuaries. If life insurance on the primary income-earner is not part of the plan, where does the retirement money for the surviving spouse come from? Without life insurance, a plan simply places too great of a reliance on hope – and hope is not a plan.

Permanent life insurance has another advantage during accumulation years – your clients can access funds without a tax penalty prior to age 59½. This ability to access funds is significant when you consider recent Bankrate research that showed more than 30 million Americans tapped their retirement savings to pay for an unexpected expense in 2015.

Retirement savings is long-term money; taking it out of productive use is likely not the best financial move. And if someone borrows from their tax-qualified plan and defaults on their loan, it will cause income taxation and likely trigger a 10 percent penalty if they’re younger than 59½.

If your client has money in a permanent life insurance policy, they could:

• Access it when needed via a policy loan.
• Allow the loan collateral to produce dividends or continue in the investment accounts (assuming a non-direct recognition whole life policy or index loan on an indexed universal life policy).
• Establish their own repayment schedule without fear of a tax penalty if they fail to make a payment.

Finally, certain types of life insurance can be a great asset allocation for clients because they don’t have a high correlation with other assets. Whole life and current assumption universal life generally are considered fixed income products. They don’t carry downside principal risk when interest rates rise like bonds or bond mutual funds would.

And, as portfolio products, life insurance is more stable than other types of assets. If your client owns whole life insurance and pays the premium, the value can only increase. For indexed policies, it is true that the performance has some ties to the equity indexes that they track but, because of the caps and the floors, the actual correlation may be significantly reduced.

Decumulation advantages

A valuable advantage during the decumulation phase of life is that certain forms of life insurance can’t lose value. In today’s low-interest environment, many retirees have money in equity markets and take on significant volatility risk as a result. During the next bear market, these equity assets will have significant downward volatility, and selling them to generate income in retirement may result in the destruction of principal. If a client has access to a more stable asset, such as whole life, it may be better to supplement retirement income temporarily with the one asset that did not go down in value – because it can’t. That’s a huge help in managing income in retirement.

Your clients also must be aware of the tax advantages of life insurance’s cash value. Life insurance uses a first in, first out distribution method which allows loans to be paid back through the death benefit. With these benefits, there is potential for distributions to remain tax-free to the policy owner. Having some portion of income on a tax-free basis can help retirees plan their income distributions to get the most out of their limited assets.

Life insurance as a permission slip

The permanent death benefit can be used as a permission slip to spend other invested assets. Suppose your client has $1 million in qualified assets at retirement – money they would need to manage carefully to ensure they don’t outlive their income. Maybe your client and their spouse live on a 3.5 percent annual income stream (adjusted for inflation) to protect both of them. This limits their retirement income and therefore restricts their ability to enjoy retirement.

If your client has a $500,000 paid-up death benefit, no more premiums are required and the death benefit will always be there. In this case, the client could take $500,000 from their other nonqualified assets and purchase a single premium immediate annuity (SPIA). Instead of having to manage to a 3.5 percent ceiling, for a 65-year old-man, the SPIA will provide an annual payment of about 6.5 percent of the purchase payment. And when the client dies, the SPIA is done, but the death benefit of the life insurance policy is there as available income for the survivor.

When your clients face their personal financial mountain, you are the Sherpa. You’re the guide who provides the knowledge and the tools they need to get up and back down again. Life insurance is in your tool kit; for many clients it should be in theirs, too. After all, you need a good rope if you’re climbing a mountain.

Karl Kreunen, CLU, is vice president, life product marketing, for Ohio National Financial Services. Karl may be contacted at [email protected].  

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