Pop quiz Everyone. What can protect your mortgage, pay for children’s college fees, provide better growth than 401ks, Roth IRAS, and similar retirement accounts, grows tax deferred and provides a tax free retirement? If you became disabled, what keeps making contributions to your retirement savings account and pays you monthly income for your troubles? What pays for long term care/assisted living expenses when you get older, provides the chance to leverage the cash value for any needs you have, and pays a benefit to beneficiaries if and when you die?
If you said Life Insurance, you understand this multi-talented financial tool better than most. However, the kicker is you only get these benefits if it’s set up properly by the right adviser who not only knows what they are doing, but also takes the time to understand your unique situation. Your plan might not have all or even most of the aforementioned advantages if not set up correctly. That’s why many people don’t realize that life insurance is so much more than just a death benefit. You don’t have to die to “win.”
Why The Old Retirement Plans Aren’t Good Enough Anymore
We’ve all heard about people losing over half the value of their retirement savings accounts in 2008. It’s almost like everyone got sucked into a scam. When most people save for retirement, they opt for a 401k, Roth IRA, or a defined benefit type of arrangement. Most of their money is in the stock market, which can be a very risky place, because when, not if, the market goes down, you lose money. You can make up that value over time, but if you’re nearing retirement, you might be out of time. Not only that, with the exception of the Roth IRA, your accounts are going to be taxed, at possibly higher rates in the future as tax professionals are predicting taxes will increase. Tax deferred isn’t equal to tax exempt.
When you’re at the mercy of the market, it puts a dent into retirement savings that can have a lasting effect. You also have a lot of rules on these accounts that force you to wait until age 59 and half before you can have penalty-free access to your money. What tends to happen is people have emergencies and dip into these accounts and lose a ton of money to taxes and penalties. And if you get sick or disabled, forget about it, because the account value will practically be stuck where you left it. What no one told you is this can all be avoided with a much better plan.
It’s Possible To Retire Tax Free With Guaranteed Income For Life
Wouldn’t it be nice to have an account that only ever went up, and never went down? I’m not talking about low risk accounts like cds, bonds, and money market accounts where the growth is so slow, that they are currently losing value to inflation. I’m talking about an account that is very competitive in return rates with high risk stocks, but without the risk of loss. This special account grows tax deferred like 401ks and IRAs, but is also tax free at the time of distribution or when paid out to beneficiaries.
This special account completely avoids probate court so your beneficiaries get it immediately, and creditors have no access to it if you die with debt. I’m not talking about a Trust that you have to pay expensive attorney fees to set up. I’m talking about an account that has no income limits like you’d see in Roth IRAs. There are actually two different products that can accomplish this, but they have unique differences.
Annuities And Life Insurance; A Two-Pronged Approach For The Perfect Retirement
Life insurance and annuities are great additions to any retirement plan. Life insurance creates an immediate legacy for your family, but it also earns interest in a cash account that is generally better than cds, money market accounts, and bonds. Life insurance also provides for a waiver of premium if disabled, and pays you a portion of the death benefit if you become ill.
Annuities similarly earn interest (between 3-6 percent for fixed indexed annuities) until an income rider is elected and then a payment is guaranteed for the rest of your life, or a period certain. Annuities can be paid into monthly or with a lump sum. As far as what’s better for your situation, it really just depends on what problems you have and want to solve. Both of these plans do similar things, but they have specializations, the annuity being guaranteed income for life, and life insurance providing a guaranteed legacy for heirs. Of course, it doesn’t have to be one vs the other.
Annuities can provide a legacy as well, but nothing near what Life Insurance can provide. Conversely, life insurance can provide great retirement income that could potentially run out if mismanaged, and of course a guaranteed death benefit, but an annuity will generally pay a better monthly income, guaranteed until death.
Annuities are generally bought with a lump sum for someone closer to retirement age. Whole life insurance is generally purchased earlier (retirement plan wise, but it works for older clients too) and paid for with monthly premiums, but allow for lump sum payments as well (typically older clients) to create an immediate death benefit 5 times the premium amount used to pay it. Permanent life insurance provides long term care benefits just in case you get sick and need assistance with living.
Life Insurance isn’t just a death benefit or retirement cash account plan. If you become disabled, Life insurance will take over and pay your contribution payments when you no longer can and provide you with disability income. Good luck finding that anywhere else. It also has health benefits if you become terminally ill, and covers you for serious diseases like cancer. No 59 and half rule and no 10 percent penalty like annuities.
Life Insurance never requires a minimum distribution. To top it off, it comes with an immediate death benefit for beneficiaries that grows over time. One major consideration between Life Insurance and Annuities is that life insurance has to be qualified for with health, foreign travel status, legal status, dangerous hobby checks and other adverse risk factors. Annuities have no qualification requirement. If you have the cash, you’re in.
The Two Best Life Insurance Plans For Retirment; Indexed universal life vs Whole Life
An Indexed universal life insurance plan specifically provides a much better chance for cash growth than whole life or annuities, as well as providing a death benefit for heirs and living benefits similar to whole life. However, without careful planning, the income in retirement can run out with both IULs and whole life, which is a problem many people have with their 401ks and IRAs. IULs historically provide better returns than whole life by about 2 percent points (6-7% IUL vs about 4-5% WL), which can make a huge difference with compounding interest. However, IUls are not quite as secure as whole life plans, meaning if the IUL cash value runs out, the plan lapses(Read; Ends), whereas Whole life insurance stays in place if cash value is spent down to nothing, you just have to pay the premium.
And Then There’s The Modified Endowment Contract
An MEC is a life insurance plan that is intentionally over-funded past the IRS maximum for a death benefit, called the 7 Pay Test. Modified endowment contracts are for clients that want to keep the cost of insurance low while making periodic payments or a lump sum payment to give their beneficiaries a tax free death benefit. It’s a bad plan if you want to use it for retirement income, because earnings are taxed (and earnings come out first in withdrawals), and has penalties before age 59 and a half.
It Doesn’t Have To Be One Plan Vs The Other
These plans can be combined to cover different bases to suit your retirement goals. However, they work very well individually if only one plan can be purchased. Given that scenario, one would have to go over the pros and cons of each with an insurance adviser to figure out what plan best fits their situation and where they are at in life.
Who Should Consider Annuities
Deferred Annuities can round out a retirement plan with no risk growth the same as cds and bonds, often with better rates of returns, but its winning feature is contractually guaranteed income for life. It’s also very easy to rollover money in retirement accounts into annuities without paying taxes or fees, because annuities are qualified under IRS rules. If you can’t qualify for life insurance on a health basis, annuities are a great low risk plan for accumulating wealth.
You can also turn a lump sum into guaranteed income immediately with immediate annuities, either for a period certain like 10 years, or for life. If you want your money paid out to you over a period of time with interest, annuities do it better and guarantee it better than any other way. One caveat on immediate annuities, you lose control of the money you put in and have to take the contractual payments. Deferred annuities let you keep control when you want to receive payments.
If it’s a deferred annuity, make sure you don’t need the money anytime soon. Annuities aren’t liquid like life insurance. Annuities have rules on when you can withdraw cash tax free the same way investment plans like IRAs and 401ks do. There is a 10 percent penalty if withdrawing before age 59 and a half. Annuities also have a surrender charge period, which lasts about 10 years. The surrender charge is usually 10 percent, decreasing by about a percentage point every year, until year 10 or so when it reaches 0. If you withdraw cash from it during those years, you pay the surrender charge and the 10 percent penalty. So make sure you don’t need the money that you put into an annuity any time soon.
Cliffs on who should consider annuities:
1.)——-Those who want decent low risk growth on savings in an account that only goes up, never down
2.)——-Those who want guaranteed income that’ll never run out.
3.)——-Those who want to leave a legacy to kids that will never decrease in value or get spent down.
Who Should Consider Life Insurance?
The main purposes of life insurance is to provide a death benefit to replace lost income, pay off a mortgage, and cover funeral expenses. However, life insurance is also a great retirement vehicle that can provide safe growth competitive with stocks and bonds. Life insurance is very liquid, as in you can take policy loans that you never have to pay back, and since your cash value and death benefit keeps growing, it offsets the effect of pulling the loan. The loan is tax free, penalty free, and no 59 and a half rule.
If you do pay the loan back, you’re paying yourself back, so go ahead and bank on yourself. If you need for your plan to complete itself, even if you become disabled, life insurance has a disability rider that makes your contributions, and pays you a monthly income.
Cliffs on who should consider life insurance:
1.)——Anyone interested in making their kids rich when they pass. Life insurance provides a better legacy than any other product in the world.
2.)——Those who want decent low risk growth on savings in an account that only goes up, never down.
3.)——Those who want a death benefit for heirs that never goes away (as opposed to retirement savings like 401ks, which can be outlived)
4.)——Those who want a plan that will continue contributing to itself even if they become disabled.
5.)——Those who want to use a portion of the death benefit to pay medical bills if they come down with a chronic or critical illness or need help with long term care and assisted living.
6.)——Liquid cash anytime
7.)——Pay for college without adding to the EFC (Estimated Family Contribution) for financial aid, unlike 529 plans.
Choose Both Annuities And Life Insurance
Many people should choose both because we need life insurance for heirs and a guaranteed income for life for ourselves. So implement both into a retirement savings strategy.
To figure out exactly how much these plans would cost for you, click here for a free quote request.
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