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.

Life insurance retirement plans (LIRPs)

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.

Diversification with LIRP

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: 

Cash value withdrawals & loans

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.  

Accelerated death benefit & long-term care (LTC) riders

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):

• Serious illness coverage: ADB allows policyholders to receive a portion of their death benefit in advance if they are diagnosed with a qualifying critical illness, such as cancer, stroke, or a terminal illness.
• Mitigating medical expenses: By accessing a portion of the death benefit early, policyholders can use the funds to cover medical expenses or other costs associated with their health condition.
• Preserving retirement savings: ADB provides a financial cushion during a health crisis, reducing the burden on the policyholder's traditional retirement savings. This can help safeguard retirement assets from being depleted by unexpected medical costs.

Long-term care (LTC) riders:

• Coverage for extended care needs: LTC riders offer coverage for long-term care needs, such as nursing home care, home healthcare, or assisted living facilities, in the event of chronic illness or disability.
• Financial support for care expenses: Instead of relying solely on retirement savings to cover long-term care costs, policyholders with LTC riders can use the benefits from the rider to help pay for necessary care services.

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.

Avoiding modified endowment contract (MEC) status

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:

• Tax consequences: If policyholders take withdrawals or loans from a MEC, any earnings above the basis are taxed first, with the basis being returned second. An additional 10% penalty may apply if the withdrawals occur before age 59 ½. However, the death benefit paid to beneficiaries from a MEC will be received tax-free.
• Impact on flexibility: Once a life insurance policy becomes a MEC, it will remain a MEC for the life of the policy. Further, any 1035 exchanges into a new policy will also cause that to become a MEC. This may make it more difficult for an individual to find better insurance options as they become available. 
• Complex tax reporting: Managing the tax implications of a MEC can be complicated. Policyholders may face challenges in accurately reporting and complying with tax regulations, potentially leading to more unintended tax consequences.

Next steps

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:

• Easy client intake: Modern Life offers digital intake forms, enabling clients to conveniently complete necessary documentation from the comfort of their homes. This can accelerate the underwriting process, ensuring clients promptly get the coverage they need.
• Document management: Our single-point document management system minimizes paperwork-related mishaps, enhances organization, and promotes efficient case management. 
• Status & requirement tracking: Advisors can effortlessly track the status requirements for each case. This real-time tracking system keeps you up-to-date and enables you to proactively engage with new and existing clients, helping to expedite the underwriting and approval process. 
• Product choice: Modern Life offers diverse coverage options, allowing advisors to cater to various client needs. Advisors can also compare quotes from multiple carriers to find the best options that align with client preferences.
• Responsive brokerage support: Modern Life provides dedicated support for complex cases, ensuring advisors receive the assistance they need. This support results in faster approval times and cost savings for your clients. 

To see our tech platform in action, complete the demo form below.