Many people do not view life insurance as an essential and vital part of a retirement income plan. They see life insurance primarily as a way to protect families from the early loss of a breadwinner during the working years. However, life insurance has the potential to be so much more if properly utilized in a comprehensive retirement income plan. Having the correct type of life insurance and the appropriate amount of life insurance coverage in retirement will accomplish multiple objectives. It can help protect your income, provide tax-free cash flow, help manage taxes, provide peace of mind to family members, and even improve the total returns in a portfolio.
There are several forms of “permanent” life insurance that accumulate cash value – whole life, universal life, guaranteed universal life, indexed universal life, variable life, and variable universal life. The difference between these policies are numerous, but generally revolve around the flexibility and length of premium payments, crediting of cash values, and how cash values can be invested.
Using certain forms of life insurance for cash value accumulation can be a strategic way to build wealth in a tax advantageous way, while also adding a layer of death benefit protection. Overfunded life insurance of various types has been around for a long time in the public corporate marketplace, being used to informally fund deferred compensation for key executives as a retention tool. It is now also used by owners of pass-through companies and in bonus situations for the benefit of key people in smaller organizations.
It can be a great tool for individuals creating a tax-free income in retirement as a supplemental strategy to their core savings and investment approach
The form of life insurance that is typically recommended for older individuals for retirement planning is Indexed Universal Life (IUL). When compared to Whole Life, it is more complex but also offers more flexibility and higher cash value growth potential. When compared to Variable Life, it provides more protection from the downside risk of cash values, which is useful when using it for income in retirement. Below is an overview of IUL and why it’s useful for retirement planning:
Key aspects of a good candidate for IUL include:
Key benefits of IUL include:
These policies are structured with a 10+ year investment and withdrawal horizon, and to maximize the allowable cash value and minimize the death benefit to keep costs low – benefiting from Modified Endowment Contract (MEC) avoidance – and should be used as a compliment to other investments, not as the main strategy.
Overfunded life insurance is essentially an indexed universal life, whole life insurance, or variable universal life insurance policy where additional cash contributions are made to boost the policy’s cash value. This added cash grows tax free in the policy’s cash account and can be accessed via cash withdrawals or policy loans.
Overfunded Universal Life Insurance is designed to maximize tax-free withdrawals in a number of ways. A max fund or intentionally overfunded policy is designed to purchase the least amount of insurance to decrease the cost of insurance inside the policy. Overfunded ULI also leverages an investment strategy that utilizes options of S&P 500 to capture approximately 80% of the index return with no loss of principal risk. Insurance general account yield or return purchases options on the S&P 500 Index feature:
By using your policy strategically as your own personal bank, you can take control of your finances. Overfunded life insurance is well suited for higher net worth individuals such as business owners, corporate executives, or others who are capped out in their 401(k) contributions or do not qualify for a Roth IRA and want to set aside funds in an alternative retirement savings vehicle. This is especially true if you have delayed retirement planning and are trying to make up for lost time by currently setting aside as much money as possible. Because OLI is not subject to the contribution limits placed on government-supported retirement plans such as 401(k)s, you can generally set aside more significant sums of money in an OLI. For more information about IUL and related solutions, please contact us.
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