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Life Health > Life Insurance

Life insurance in retirement income planning?

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By Patrick Kenyon

The big boom has begun. An estimated 80 million baby boomers are heading into retirement according to the Social Security Administration.

Following on their heels is Generation X, all 51 million of them. They will start hitting retirement age around 2039.

How much thought have these groups–especially the Gen-Xers–given to planning and saving for retirement? Not nearly enough.

Performing a retirement gap analysis is a good place to start focusing clients. Once the traditional resources–Social Security, 401(k), possibly a pension, and other investments–are factored in, will they have enough to support their dream retirement? Or is there a gap that needs filling?

This is the advisor’s chance to show some out-of-the-box thinking. When people start planning for retirement, they often look for something new and different. Something that offers value, growth potential, diversity and protection.

That “something” can be cash value life insurance. Whether, universal life, indexed universal life, whole life, or variable universal life, it may be one of the most overlooked opportunities to help supplement client income in retirement.

Here’s how a cash value policy can help.

It provides protection to growing families with its income tax-free death benefit while allowing for access to cash, in the event of an emergency or opportunity. An optional total disability benefit rider, available on whole life and universal life policies, can help fund the policy to provide retirement income even if the insured is disabled.

Since the features and benefits of various life policies differ, the best approach for the client may be to diversify with more than one type of policy.

For clients who are closer to retirement and have policies with accumulated cash value, show them how the policy can provide tax-free cash flows through a combination of withdrawals and policy loans.

It’s important, however, to point out that loans and withdrawals will reduce the policy’s death benefit and cash value and may cause the policy to lapse. Also, note that adverse tax consequences may occur if the policy lapses.

Some other advantages for pre-retirees include:

  • No distribution requirements or penalties. Unlike qualified plans, there are no required minimum distributions at age 70 1/2. Also, clients gain the added value of choosing when to take distributions from the product and how much.
  • No effect on Social Security. Before age 65, some sources of retirement income could cause a client’s Social Security benefits to be subject to additional income tax. Tax-deferred growth from a life insurance policy will not affect those benefits.

What about the next generation? Will Social Security exist when the first Gen-Xer retires? No one knows for sure. What about 401(k)s? No one knows that either.

Who can blame this generation’s skepticism about investing in the market? That’s why the certainty of a cash value life insurance policy and its many features may be very appealing.

For instance, the guarantees are strong points to this generation. No one appreciates the value of guaranteed premium, death benefit or minimum crediting rates more than during economic conditions such as we have currently.

The income tax-free death benefit has strong appeal too. Generally, if the insured were to die, it can help provide proceeds for a secure retirement for a spouse or heirs. Then, there’s the tax-deferred growth in cash value life insurance.

Here are some other key advantages to point out:

  • Tax-free cash flows. Life insurance can provide cash flows through a combination of withdrawals and policy loans. But be sure to note that loans and withdrawals will reduce the policy’s death benefit and cash value and may cause the policy to lapse, and that adverse tax consequences may occur if the policy lapses.
  • No distribution requirements or penalties. Income taken from life insurance is generally not subject to tax penalties before age 59 1/2.
  • No contribution limits. A life insurance policy may be funded with as much or as little as a client wants to pay in annual premiums. However, also point out that too much premium creates a modified endowment contract, disqualifying the policy as life insurance for tax purposes. Too little premium could cause the policy to lapse.
  • Self completion. The death benefit of a life insurance policy can provide retirement income for a spouse if the insured dies before saving enough for retirement. Adding a total disability rider to a whole life or universal life policy can also help fund the policy to provide retirement income even if the insured is disabled. The benefit pays the schedule of premiums determined by the client at issue, even if the premium actually paid is different.

In sum, everyone wants to enjoy a comfortable retirement. The advisor can help turn client dreams into reality by focusing on retirement income planning, including the benefits of cash value life insurance.

This may be a rewarding decision for clients and also for the advisor’s book of business.

Patrick Kenyon is manager-life sales and marketing development at UNIFI Companies, Cincinnati, Ohio. His e-mail address is [email protected].


Positioning life insurance
The supplemental income aspect

  • Life insurance is an often overlooked resource to supplement income in retirement. It works best if the policyowner has at least 10-15 years until retirement and can over-fund the policy. Look for:
  • People age 55 or younger, or those who may wait to receive proceeds until later in their retirement.
  • Someone without enough life insurance who is insurable and in relatively good health
  • People who have maxed out their contributions to a 401(k) or other qualified plans and traditional or Roth IRAs, but want the opportunity for more tax-deferred growth.

Source: Patrick Kenyon, UNIFI companies, Cincinnati, Ohio


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