A retirement planning strategy that was popular in the 1980s but fell out of favor is being revived: using life insurance to create personal, defined retirement income, much like a defined benefit plan.
Wealth2k, Inc. recently launched such a strategy called DB-by-INS, which the Hingham, Massachusetts-based company says refers to the defined benefit nature of the retirement income provided and the vehicle used to provide it: life insurance. The DB-by-INS strategy–which uses either variable universal or indexed universal life insurance policies as its funding vehicle–is particularly useful for the affluent market, says David Macchia, CEO of Wealth2k, because the caps on contributions to defined contribution plans like 401(k)s limit the affluent’s ability to create a sufficient percentage of retirement income in comparison to their pre-retirement income. With the migration to DC plans over the past two decades, retirement security today looks a lot different than it did 20 years ago, Macchia says. As defined benefit plans have fallen by the wayside and the longevity of Social Security is questionable, “it has dawned on people that retirement security has been diminished because, for most people, there is no predictable level of retirement income.”
How It Works
The DB-by-INS strategy uses an administrative system that allows clients to set a long-term strategy for making their retirement income more secure. The DB-by-INS strategy “wraps around the life insurance funding vehicle and transforms it into a DB,” Macchia explains. A policy owner will first start with buying a life insurance policy, “but you don’t want to buy a life insurance policy with the intention of trying to build as much insurance in it as possible,” he says. “You want to do the opposite–you’re trying to buy close to the minimum insurance possible for a given dollar amount because you don’t want to burden the concept with too much cost; insurance can be costly.” The policy owner then decides the age at which they wish to retire, their target retirement income, and an assumed interest rate growth.