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Retirement Planning > Saving for Retirement

Life Insurance for Protection — and Retirement Savings

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After the turbulent times we’ve experienced in the financial markets in recent years, I’m guessing none of you have clients who believe they have sufficient, much less excess, retirement income potential.

The typical scenario involves disgruntled clients with depressed assets and extended retirement date projections. Not a very pretty scenario — and certainly one that keeps you answering questions like, “What do we do now? I’d like to retire someday!”

Current low yields on alternative places to put your clients’ funds make it difficult to justify placing large portions of their assets in CDs, money market accounts or even Treasuries.

More importantly, if these same clients have insufficient life insurance coverage, their families and businesses are at even greater risk if their incomes were no longer there to carry the load.

Are your clients in need of the following?

  • Protection for their family in the event of their “untimely demise”? (Query: When has anyone ever experienced a “timely” death?)
  • An accumulation vehicle that grows on a tax-advantaged basis?
  • The potential to access that accumulation vehicle (the cash value) when they want it, without government restrictions or red tape, using tax-free loans and withdrawals?
  • An income tax-free benefit paid to the family in an amount generally greater than the value of the asset at death?

Sure, they probably have a qualified plan or 401(k), often the easiest way to save for retirement, but those also generate taxable income and have numerous restrictions on when and how much you must take out. They may also have annuities, which provide for tax-advantaged accumulation and can provide guaranteed lifetime income, but they are subject to government restrictions on when distributions can be taken without tax penalties. They may even have Roth IRAs, which provide outstanding tax benefits, but which also have contribution and income limits that make them unlikely to be a major factor in your clients’ retirement success.

Control is the name of the game for the new consumer. They want to determine what they can take and when, without the government looking over their shoulder. Wouldn’t it be helpful if there were a financial product that could protect their families, allow tax-deferred accumulation and create potentially tax-free income? Enter cash value life insurance.

Customize Side Benefits

While the primary purpose of life insurance is to provide a death benefit that protects families, there is no requirement that we turn our backs on the other unique tax advantages this product offers.

Where appropriate, the advanced sales staff at the companies you do business with can add an additional level of design to these situations, depending upon the circumstances of the individual case. For example, if asset protection is important to Dr. Smith, we can have her policy owned by a spousal lifetime access trust, giving her spouse access to the policy’s cash value.

Another effective technique is to have a second-to-die policy owned by only one spouse, who is also the sole premium payer. Upon his death, the policy passes by contract into an irrevocable life insurance trust. This technique, known as a survivorship standby trust, keeps the proceeds out of the estate of the second spouse to die. Add to this the funding alternatives of executive bonus or split dollar, and you can see that each program can be custom designed to meet the needs to your particular client.

Because of the flexibility in how the product is designed and how much one can put into it and when, there is also flexibility at the back-end, when clients are looking to convert their assets to cash flow on a tax-advantaged basis.

You all are aware of the fact that if a life insurance policy is designed correctly (to avoid making it a modified endowment contract, or MEC), then distributions in the form of withdrawals and policy loans can be taken income tax-free in the future. I’ll be the first to admit that this process needs time to work — typically at least 10 years, since permanent life insurance policies usually have surrender charges that reduce the amount available for distribution in the early years of the policy. The policy also needs to be adequately structured and funded. Loans and withdrawals reduce the policy’s cash value and death benefit — you don’t want to distribute cash value to such a degree that the death benefit protection provided to the beneficiaries is too small. If the policy is allowed to lapse, all money taken from the policy could potentially be taxable. But with a proper design and a long time frame, this can be a viable strategy. And wouldn’t it be nice for your clients to have an additional source of retirement income in the future, that can be taken when they choose, on a tax-free basis?

Design for Maximum Flexibility

Using a life insurance policy with a universal life chassis adds flexibility to how the contract can be funded over time. Annual premiums can be varied in amount. Additional “found” money, such as inheritances and bonuses, can be added when appropriate, and with sufficient accumulated cash value, premiums can even be skipped in particularly bad years for the client. Annual statements make keeping up with the performance of the policy and required future premiums much easier than requesting an in-force policy statement each and every year from the insurance company.

We won’t get into a discussion of which asset to tap first for income — that’s why my wife and I hired a financial planner — but additional sources of cash flow, particularly when they can be accessed without current income tax, certainly enhance the client’s position.

In addition, many policies can provide living benefits in the form of optional accelerated benefit riders (ABRs) that allow the client to accelerate a portion of the death benefit, generally income tax-free, in the event of a critical, catastrophic or terminal illness. Perhaps your client has balked at taking on a long-term care policy because of the high cost of the premiums. Accelerated benefits riders, while not a replacement for long-term care insurance, add an additional measure of protection to the overall financial plan, often with no additional premium. Clients do need to be aware that benefits received through an ABR will reduce the cash value and death benefit of the policy, reducing the amount available to the family as a death benefit.

Also, a number of modern contracts also offer some type of lifetime income rider, which generates a tax-advantaged income your client cannot outlive. Isn’t that one of their main goals to begin with?

I’m not suggesting that one type of financial vehicle is the be-all and end-all for your clients’ financial portfolio. It is clear, however, that having numerous sources of income that perform and are taxed in different ways can add a type of diversification and flexibility to the process that gives clients additional choices for how to proceed in the future when they’re ready to stop or slow down their work and begin to enjoy the fruits of their labors.

If we can secure some of this flexibility from a product that is also self-completing and protects the family’s financial future with a significant death benefit that can pass to them free of income tax, then we have a strong and compelling alternative to present to the client. It will give them comfort and enhance the program you have provided to them up until now.

Pat Lang, J.D., CFP, CLU, ChFC, CFS, FLMI, is the vice president of sales strategy & business development for National Life Group in Montpelier, Vt. A veteran of 39 years in the business and 29 years in advanced sales, Lang is a past chair of LIMRA’s Advanced Sales Committee and an associate editor of the Journal of Financial Service Professionals.