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Life Insurance as a Retirement Vehicle

by 01/24/2017

A Brief Guide to Using Life Insurance as a Retirement Vehicle

When my clients plan for their future retirement, most of them think of how to maximize the growth in their IRAs, 401(k)’s, annuities and other retirement accounts.  The goal for everyone is, of course, to establish a stable and sizable retirement while doing so with as little investment during their working years as is possible.  So, what does that have to do with buying life insurance?  Everything, especially for clients under the age of 50. 

Let’s take a look at an average 40 year old that is planning to retire at the age of 65.  Over the coming 25 years, this client decides to invest $300/month into his retirement accounts and (for the sake of the example) let’s say he somehow knows that the average rate of return on this money will be 6% per year (a little higher than the historic average).  When this client turns 65, he retires and begins to live off of that money, along with Social Security.  A likely scenario would be that he would roll that accumulated money into an annuity when he reaches retirement, which would pay him a monthly guaranteed benefit for the rest of his life.

How much did he accumulate? His accounts would be worth $209,000 from payments into the accounts of $90,000 over the 25 years. His likely income from that in retirement? Probably at or slightly above $1,000/month for the rest of his life. Is there a better way to go? Yes, there is and thank you for reading this far into the article.

If this same 40 year old, instead of socking away his money into traditional retirement accounts, instead buys an Indexed Universal Life Insurance policy (IUL) and uses that same $300/month investment, he could both be insured for the rest of his life, to the great benefit of his family, but also receive the retirement he wanted from the same product, with the added bonus of avoiding taxation.  It seems reasonable to assume that most 40 year old will spend money during their working years on life insurance, so by combining retirement with life insurance, you've managed to kill two birds with one stone, and someone paying $300/month for an Indexed Universal Life policy, intended for retirement, wouldn't also have to buy additional coverage.  He has that covered.

In the example above, the IUL product would provide $250,000 of permanent life insurance, that also increases to provide a death benefit of the $250,000 plus all cash value accumulated within the policy.  By age 65, that death benefit would be approximately $440,000.  At age 65, this client would stop paying the premium, and instead start receiving $1,000/month as a TAX FREE distribution from the policy.  That distribution would come for the rest of his life, but the life insurance would persist as well, so his family is continually protected.

If this client, benefiting from the medicine of the future, lives to the age of 100, he will have paid $86,400 in premium (between the ages of 40 and 65), but then received $432,000 of tax free retirement plus his family would receive the death benefit of about $335,000 when he passes away.  So, for $86,400, he and his family get $767,000 in return.  No typical retirement account can compete with that.

And though I’m sure you didn't miss the bold print, the distribution would be coming to this client TAX FREE.  Unlike traditional retirement accounts, which grow TAX DEFERRED, distributions from life insurance are paid out with owing zero in income tax.  Tax deferred growth is great (and means the accounts grow without owing taxes until money is withdrawn) but down the road, the IRS will treat income from that money as 100% taxable, with most retirement accounts.  That $1,000/month comparison above really weighs far more in the favor of using insurance, if for no other reason than that it helps preserve the income even from government taxation.

This approach is an important part of retirement planning and is often ignored by many financial planners.  Please contact our office for a complete review of your retirement plan and let our experts advise you as to whether this approach is appropriate for you.

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