How Permanent Life Insurance can act as a backstop for Retirement Needs
Had a client who had saved money into a qualified plan for his retirement income needs. The client also had a need for more life insurance to give to his children additional financial protection. Ultimately a permanent life insurance policy was able to address his immediate protection needs, while also potentially offering him a way to enhance his retirement income.
Designing a case and creating a plan
In discussing the client’s goals, we determined that at age 65, the client will need to withdraw $50K annually from his qualified plan – along with Social Security – to reach the $80K income need. The issue that was uncovered was that an estimated $22,400 in income taxes would be due from the distribution from his qualified plan.
Since Social Security is a fixed amount annually, the only way to pay those taxes would be to take additional distributions from the qualified plan in year two. Therefore, at age 66, to achieve the income need and account for taxes due from the prior year’s income, he would have to withdraw $72,900 (instead of $50,500) from his qualified plan.
As time goes on, due to the impact of income taxes and and factoring in only two years of “unexpected expenses,” the projected qualified plan would be exhausted by age 81. Life expectancy is age 86.
We were able to illustrate a way to minimize the tax burden and extend the life of the qualified plan by using life insurance.
The proposed plan would be that the client allocate $2000 per month into an Accumulation IUL policy (Capped Account 6.05%), payable for the remaining 15 years of his working years. To enhance his value proposition, we also recommended that he add a Long-Term rider (1%) to help protect against his risk.
The initial death benefit in this design is about $657,000, which helps protect his children in the event of premature death. By age 65, this policy is illustrated to accumulate cash value of about $465,000 and the death benefit will have increased to over $915K, giving the client the opportunity to turn the policy’s cash value to offset the tax costs on his distributions from his retirement plan.
By utilizing the policy’s cash value to cover the income tax payment of $22,400, the year two distribution from the qualified plan is reduced to $50,500 from $72,900, the client’s taxable income in year two is reduced from $103,200 to $80,800, and the income taxes due in year three is reduced from $28,896 to $22,624. This reduction in taxable distributions from the qualified plan preserves the plan balance and at age 81 the plan has over $856K.
Additionally, the policy cash value at age 81 is over $508K. Income from the qualified plan can continue at base levels with tax payments continuing to come from the life policy through age 102.
The charts below illustrate the differences in tax payments as well as the difference in longevity of the qualified plan by utilizing this design.
Conclusion:
A qualified-plan-backstop approach can help illustrate how our clients can prepare for many of the risks often overlooked during the accumulation phase of life. This plan shows how clients can minimize taxes, protect their qualified plans against risks related to long-term care and pre-mature death and, most importantly, preserve and extend the life of their qualified plans.
If you would like to discuss this strategy for yourself or have any questions please contact us at info@crosspointwealth.com or 630-799-8350.
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