Many advisors don’t see an obvious connection between life insurance and retirement planning.
After all, life insurance is best known for protecting your client’s family, particularly during their working years when children are younger and financially dependent. The truth is life insurance can offer much more than death benefit protection. It can also help your clients achieve a variety of retirement goals, including:
Fill gaps in retirement saving that may happen with premature death or job loss.
Help to provide income in retirement, even with unplanned medical needs or other emergencies.
Meet late-retirement objectives, such as leaving a legacy for children or grandchildren.
Of course, there are three main types of life insurance products that can meet retirement planning needs:
Term life insurance: Provides economical death benefit protection for a specific period.
Protection-focused permanent life insurance: Offers a death benefit for an indefinite period. (It might offer some cash value or simply a guaranteed death benefit.)
Accumulation-focused permanent life insurance: It offers a death benefit, but it’s also designed to accumulate cash value that can be used for a variety of future needs.
Fill a Retirement Savings Gap
You already know that your clients need life insurance coverage to meet basic family needs in the event of a premature death. But what about replacing the money they planned to continue saving for retirement if they lose their job?
Job loss. Many employers offer group term coverage that can help fill a retirement savings gap, but that makes job loss a risk on multiple levels, because it could lead to a loss of these benefits. An individually owned policy can help to ensure that at least some of the retirement savings gap is covered, even if your client were to lose or change jobs.
Business owners. If your client is a business owner, job loss might not be a concern. But business owners are often so focused on running the business that they don’t give their own retirement much thought. A qualified plan, such as a 401(k), can reduce your client’s tax burden, but business owner research from Principal shows that only 52% of small-to medium-sized businesses sponsor a qualified retirement plan. For many business owners, personal insurance coverage offers a way to diversify income sources in retirement, while accumulating savings that isn’t subject to the qualified plan funding limits, and providing a death benefit.
Provide Income in Retirement
Most clients and advisors would agree that a comfortable retirement includes knowing that basic needs will be met and a nest egg will be available for unplanned expenses. Life insurance can be an important part of the retirement income strategy, by diversifying income-tax, balancing risk and providing flexibility.
Income-tax diversification. You already know the importance of diversifying investments, but income tax diversification can offer added value. When some of your clients’ assets are only partially-taxable, or even income tax-free, they can plan around income tax limits and thresholds, such as the taxation of Social Security income, and the impact of their income on Medicare Part B premiums.
Permanent cash-value life insurance offers a source of potentially income tax-free funds, because withdrawals generally come first from the policy owner’s basis. Make sure you ask if the insurance carrier offers a convenient way to receive this income, and protections to help prevent adverse tax consequences.
Balancing risk. You talk to your clients about risk and reward going hand in hand, and you might recommend less exposure to stock market risk closer to retirement. Still, maybe you advised that some market exposure counters inflation, which can erode a retirement nest egg over time.