5 Ways Life Insurance Can Boost Clients’ Retirement Plans

2. Increase retirement income options.

Life insurance policies can provide income during the insured’s lifetime, Martin explained. The rules on high cash value policies are complicated, but clients whose policies are not classified as modified endowment contracts (MECs) have several tax-favored options for withdrawing funds.

“If the contract’s value is below the MEC limit, you can take withdrawals up to your basis and take loans tax-free,” Martin explained. “So, you can use the policy while it's in force without incurring taxes, if you keep it in the non-MEC zone.”

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3. Enhance portfolio tax efficiency.

It’s a portfolio’s after-tax return that matters, Blanchett pointed out. For example, yields on 10-year Treasurys climbed over 3% in June. But for investors who are paying marginal tax rates above 40%, the bonds’ after-tax yield drops considerably.

In contrast, increases in a life insurance policy’s cash value grow tax-deferred until withdrawal. “If you give an investment the opportunity to grow tax-deferred, possibly tax-free, for 20 or 30 or 40 years, it can lead to radically more wealth for a client to use in a variety of ways,” Blanchett said.

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4. Enhance portfolio diversification.

A life policy’s cash value growth is generated by the issuing insurance company’s general account, and that account’s performance tends to match the returns generated by high-quality, intermediate-term corporate bonds.

“If you are a financial advisor, (and) you've got a portion of your portfolio in intermediate-term corporate bonds, the general account portfolio of an insurance company looks like that part of your portfolio,” Finke explained.

But there is an important difference between the portfolios, he adds. Even though insurance account assets are invested in intermediate-term bonds, those bonds are held until maturity and the insurance company actively smooths their portfolios’ returns and cash value growth over time. Consequently, the insurance policy’s value doesn’t experience the same volatility as comparable portfolios built with assets like mutual funds.

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5. Optimize legacy plans under the Secure Act.

Clients generally want to pass assets to heirs in the most tax-efficient manner possible. Life insurance can help achieve that because insurance policy death benefits are not taxed to beneficiaries.

The Secure Act curtailed popular tax-reduction strategies such as the stretch IRA. Additionally, Congress has extended the starting age for required minimum distributions (RMDs) and is considering a further extension. “Now that we're seeing RMDs getting pushed back farther, there are more people dying with significant assets within their IRA,” Finke noted.

“It makes sense to begin giving some thought to whether or not a retiree, instead of dumping a huge amount of money in IRA assets on a beneficiary, should take a portion of those assets out and fill up tax brackets prior to RMDs kicking in,” he said. “They can then use that money to buy a life insurance policy that can then more efficiently transfer money to their kids.”

Life insurance policies also offer additional payout options besides lump sums. For clients concerned with heirs' ability to manage an inheritance, life insurance can provide more post-mortem control than leaving money in an IRA.

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