What do you really know about life insurance?
You may already know that life insurance can pay off your home and fund your children’s college costs. Of course you know it comes with a competitive cash growth account on par with 401ks, IRAS, mutual funds etc., that grows tax deferred with tax free distributions. You might even understand that if you became disabled, it keeps making contributions to your cash savings account and pays a monthly income for your troubles. Some understand it 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 the insured dies.
What most people don’t understand is that there is no catch. Life insurance really does all of that. And yet, with all of this knowledge, people still find ways to over-complicate it. If you already have life insurance and some of this information is new to you, now is the perfect time for a policy review with a life insurance professional. 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 can potentially put a dent into retirement savings that will 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, subsequently losing a ton of money to taxes and penalties. If you become sick or disabled and lose the ability to contribute to your savings, your account won’t reach it’s potential. What no one told you is this can all be avoided with a much better plan.
You Can Have Your Cake, And Eat It Too
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. Again, the right kind of life insurance is far from just a death benefit. You can experience the benefits while still breathing.
Nothing Leaves A Better Legacy Than Life Insurance
Wouldn’t it be great if your retirement plan doubled as a legacy to set your kids up with capital to get their lives started? Do I have to explain the leg up your kids and grandkids will have in our competitive economy? You can be the guy that started it all for your family for generations to come. Generational wealth should be a goal we all strive for. Life insurance is a way for the average middle class person to leave something for their kids, guaranteed. No trust fund needed. So go ahead and get rich, but make your kids even richer.
Can’t I Leave a Legacy With My 401k, IRA, Or Other Savings Account?
Yeah! And we can all swim to the coast of Italy, but isn’t their a better way to get there? 1 dollar buys 5 dollars of life insurance. Nothing else does that. Not your retirement plan, not anything. Throw in taxes and it’s a wrap. Nothing can compete with life insurance when it comes to leaving money behind after death. There is also the fact that debt creditors have access to most retirement account proceeds. Many seniors die with medical debts. And what happens if you outlive those savings? Not only will you need life insurance to cover your burial, but you won’t be leaving much money behind outside of that. IF you outlive your savings in a whole life plan, you still get a guaranteed death benefit for your beneficiaries.
A Quick Word On Term Life
Term life insurance is temporary. It typically lasts 15, 20, 30 years or so, and then it comes to an end. People buy it because it’s the cheapest life insurance you can get. The thinking is, after the term ends you won’t have as much need for the life insurance anymore because your kids grow up and move out, the house is paid off or close to, and you’ve got bigger savings. At this point in your life, you can probably self-insure for your funeral or convert your term life plan into a whole life plan before it ends to cover your burial or whatever else. This is the cheapest way to go if you just want a death benefit and nothing else. Of course, it doesn’t have to be one or the other. Many people get Permanent life insurance to get the living and savings benefits, and then make up the rest of their insurance needs with term life insurance to keep thing affordable.
The Two Best Life Insurance Plans For Retirement; Indexed universal life vs Whole Life
Indexed Universal Life Insurance and Whole Life Insurance have many of the same benefits with a few difference. For Starters, IULs have flexible premiums (minimum, Target, Maximum). I’ll say this though. If you can’t afford to fund an IUL at the max, don’t bother with it. Let me explain. Your premium payment affects your cash balance, and your cash balance is used to pay policy expenses. When you fund at the max, you make sure your policy grows at a better rate and never lapses (Read; Ceases to exist). Some people aren’t aware of this when the policy is sold to them because of bad or uneducated agents.
IULs Are Subject To Surrender Charges
A surrender charge is what you pay if during the surrender charge period, you cancel your policy or withdraw cash incorrectly. the surrender period typically lasts for 10 years from the onset of your policy. The surrender charge starts at about 10 percent and goes down yearly by about 1 percent point until it hits zero on year 10. If you need money from your policy during the surrender period, there’s a very simple way to avoid the surrender charge.
Take Loans Instead OF Withdrawals To Avoid Taxes And Surrender Charges
I know what you’re thinking. Taking loans is a bad idea and this plan sucks. I originally thought that too until I realized 1.) You don’t have to pay back loans and 2.) Whenever you do take loans, a collateral account is automatically set up along side it to counteract the loan interest rate. For all intents and purposes, a policy loan is a tax free withdrawal, with none of the drawbacks of the loans we all know and understand in other walks of life. This method of withdrawing is also the preferred for whole life plans to avoid taxes.
IULs Have Better Cash Growth Than Whole Life, As Well As More Risks
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. 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 big difference with compounding interest.
Without careful planning, the income from life insurance can run out with both IULs and Whole Life, which is also a risk with 401ks and IRAs. Running out of cash sucks and clearly something went wrong with regards to the retirement strategy where that happens, but at least with whole life insurance, you keep your death benefit. IULs on the other hand lapse (Read; Ends), when the cash value runs out or hits zero. 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 needs.
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:
- Life insurance provides a better legacy than any other product in the world.
- Decent low risk growth on savings in an account that only goes up, never down.
- Death benefit for heirs that never goes away (as opposed to retirement savings like 401ks, which can be outlived)
- Plan will continue contributing to itself even if they become disabled.
- 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.
- Liquid cash anytime
- Pay for college without adding to the EFC (Estimated Family Contribution) for financial aid, unlike 529 plans.
To figure out exactly how much these plans would cost for you, click here for a free quote request.
Blue Crush Insurance
