Retirement Planning

4 Great Ideas for Using Life Insurance in Retirement Planning

As clients approach retirement, their focus usually turns to generating income, adjusting portfolio risk, and avoiding asset spend-down. They may not consider life insurance a top-of-mind planning need at this time, but it should be.

Life insurance is a multi-faceted product that can help enhance the quality of retirement in diverse ways. In addition to death benefit protection, the cash value of permanent life insurance can be a tax-free source of retirement income. Cash value also can be used to fill retirement income gaps and create a ready source of funds for emergency needs.

Here are four ideas for using life insurance as a key tool in planning for retirement:

Increasing, Flattening and Reducing Tax Impact

Qualified retirement plans such as 401(k) plans can have a substantial tax burden. The money gave a tax break when it went into the account, but now the tax needs to be paid as it is taken out. There are three ways to pay tax when money continues to accumulate in a taxable account:

  • Allow the account to just grow. It will also compound (increase) the tax liability year after year.
  • Withdraw the earnings each year and reallocate those dollars to a tax-favored account. This flattens the flat tax liability.
  • Systematically withdraw a fixed dollar amount, including principal, and eventually reallocate the entire account over to a tax-favored account. This final option causes a reducing tax liability over time.

It is here, in this third option, where a maximum funded permanent life insurance policy can be used to reallocate these dollars. This gives access to the cash value, lets it grow tax deferred, allows people to withdraw it income tax-free and creates an income tax-free death benefit for their heirs.

An Extra Bucket for Big-Ticket Items

I think there is great value in having many buckets available to supply retirement income. Just as you want diversity in your investments, you want diversity in your income streams. Conventional retirement buckets include 401(k)s, Traditional and Roth IRAs, Social Security and deferred compensation. Life insurance provides another bucket from which retirement income can be pulled tax-free, in flexible or large amounts, quickly and easily.

When you have an opportunity to buy a property and need cash quickly in order to close, it may be too difficult, too taxable or the account is down due to the market, to take it from your other buckets. A possible tax-free loan or withdrawal from the cash value of your life insurance contract is a great option to have available.

Enabling Early Retirement

For clients in their 30s and 40s, I always explore with them the potential to begin retirement before age 59 ½. Most people plow every nickel into qualified plans, because they are told by the media that it’s a good idea. What they don’t realize is that if they retire before 59 ½, they may have limited access to income without paying a penalty. Their options are limited. If you think you might want to retire before 59 ½, I suggest looking at building up the cash value of a whole life insurance policy to potentially use to fill some of the income gap until that age.

Addressing Retirement Uncertainty

As retirement approaches, clients can be overwhelmed by uncertainties. They include: 1) longevity; 2) income sustainability; 3) market volatility; and 4) whether money will remain for heirs. A combination of permanent life insurance and single premium immediate annuities (SPIAs) can be designed to address all four of these concerns.

I hope these can help you understand how life insurance can be part of the bigger picture of your retirement goals. I hope I’ve also dispelled the myth that life insurance is no longer needed when you retire.

For educational purposes only. Not to be relied upon as financial, tax, or legal advice.  

Accessing cash values may result in surrender fees and charges, may require additional premium payments to maintain coverage, and will reduce the death benefit and policy values. Loans are income tax free as long as Policy is not a “modified endowment contract” (MEC) and policy must not be surrendered, lapsed, or otherwise terminated during the lifetime of the insured. Policy must not be a modified endowment contract (MEC) and withdrawals must not exceed cost basis. Partial withdrawals during the first 15 policy years are subject to additional rules and may be taxable. Excess policy loans can result in termination of a policy. A policy that lapses or is surrendered can potentially result in tax consequences. The Penn Mutual Life Insurance Company and Hornor, Townsend, & Kent, LLC do not offer tax advice. You should consult a qualified tax professional for tax advice on your own personal situation.

All guarantees are based on the claims paying ability of the issuer.


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