For clients planning for retirement, securing a stable source of income is essential. While qualified plans like 401(k)s and investment accounts often come to mind, they generally limit how much you can contribute annually. Life insurance can be a great, tax-efficient way to supplement - not replace - those qualified accounts and plan for retirement while setting aside an inheritance for heirs.
We’ll delve into the innovative ways life insurance can play a pivotal role in bolstering retirement portfolios. With these strategies, advisors can empower clients with robust solutions that protect their loved ones and fortify their financial futures during their golden years.
A life insurance retirement plan (LIRP) is a financial strategy that utilizes permanent life insurance as a tool for retirement planning. In a LIRP, policyholders contribute premiums with the policy cash value growing over time on a tax-deferred basis, which can be accessed during retirement - or any time it may be needed.
Again, it’s important to note that LIRPs are not meant to replace standard retirement plans, such as a 401(k); instead, they help protect policyholders from having to dip into their retirement savings and help provide additional income.
Generally, wealth accumulation vehicles fall into three categories - tax-free, tax-deferred, and taxable, each with advantages and disadvantages. An individual with a diversified portfolio that includes life insurance may be able to reduce the overall impact of taxation. Here is a quick example of how this might look, assuming an individual is aiming to pull $100,000 out of their retirement portfolio:
Policyholders can utilize cash value withdrawals from permanent life insurance policies as a flexible and tax-advantaged source of funds. The cash value in a permanent life insurance policy accumulates over time based on premiums paid and interest earned.
Withdrawals from the cash value up to the total amount of premiums paid, known as the policy's basis, are generally tax-free because they are considered a return on the policyholder's original investment.
However, taking out a policy loan is often more tax-efficient if policyholders wish to access amounts exceeding their basis. Policy loans provide access to additional funds without triggering taxation, allowing for greater flexibility in managing the policy's cash value for various financial needs. While it’s considered a “loan’, typically, the policyholder is not required to pay it back at any time. Instead, the interest can be added to the outstanding loan and eventually be repaid at death using the policy proceeds. The beneficiaries receive any remaining benefit once the loan is repaid.
When discussing this with your clients, remember that it's essential for the policy to stay in-force if there is an outstanding loan against the policy. A premature lapse could trigger a taxable event for the client.
While they are not considered sources of retirement income, accelerated death benefits (ADB) and long-term care (LTC) riders can serve as valuable protections for a policyholder's traditional retirement savings by providing financial assistance in the face of severe health challenges.
Accelerated Death Benefits (ADB):
Long-term care (LTC) riders:
By integrating accelerated death benefits and LTC riders into a life insurance policy, policyholders can create a comprehensive safety net that provides financial protection for their loved ones in the event of their passing and safeguards their retirement savings in the face of unexpected health challenges.
Remember, while ADB is usually a standard part of a life insurance contract, LTC riders come at an additional cost to the policyholder.
A MEC occurs when you attempt to contribute more money to a life insurance policy than is allowed under IRS guidelines. A MEC is a tax designation under the Internal Revenue Code that can have significant implications for policyholders, including:
Modern Life is a tech-enabled brokerage that streamlines the life insurance process for advisors. Here’s a closer look at how we can help your firm grow its life insurance business:
To see our tech platform in action, complete the demo form below.
All registrants will receive a calendar invitation and link to join the webinar via Zoom. Can't make it live? Register anyway and we'll send you a recording of the presentation the next day.
Request a demo
See how we provide advisors with advanced technology, unmatched support and the advice of the country’s top insurance experts.
Insights directly to your inbox
Stay up-to-date on industry news, planning strategies, product updates, and more.