Retirement Can Seem Overwhelming
However, life insurance plays an important role in any financial or retirement plan. It helps loved ones recover from financial risks and unexpected costs, increasing their chances of reaching long-term goals and achieving dreams.
Thinking about financial protection and retirement can seem overwhelming, but as your life changes so does your financial situation.
Unfortunately, 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.
Life insurance has the potential to be so much more if properly utilized in a comprehensive retirement income plan.
Many people do not fully understand nor appreciate the value and benefits that life insurance can represent as part of a retirement plan. Having the correct type of life insurance and the appropriate amount of life insurance coverage in retirement will accomplish multiple jobs.
It can help protect your income, provide tax-free cash flow, help manage taxes, provide peace of mind to families, and even improve the total returns in a portfolio.
Here are a few strategic ways to utilize life insurance as part of a comprehensive retirement plan:
Protect Income, Especially in the Event of Death
You can’t invest your way out of an untimely death. When one spouse passes away in retirement, the surviving spouse often struggles to meet their income needs. While expenses might be lower, the drop in expenses rarely offsets the drop in income. At a minimum, one of the two Social Security benefits the couple was receiving will go away. So, for many couples, life insurance can be used to ensure that there is enough money to replace any lost Social Security or other retirement income. In this way, the surviving spouse is able to maintain his or her current standard of living throughout retirement.
Interest Rates at Historical Lows
Bonds, CDs, and Money Market Accounts are not an attractive investment for many retirees today.
One idea is to position life insurance as a substitute for bonds in a retirement income portfolio.
Right now, bonds have very little upside. They are only paying in the 1 to 3 percent range. Yet the risk of holding bonds is very high. If interest rates rise, the downside risk to bonds could be 20-30 percent or more.
Retirees should consider a whole life policy as a bond substitute for some or all of their bond portfolios. The life insurance policy can provide bond-like returns of 3 to 5 percent without the interest rate risk of a bond.
Tax-Deferred Growth, Tax-Free Cash Flow, and a Tax-Free Death Benefit
I wrote an earlier article titled “How to Understand a Tax Efficient Distribution Strategy So You Can Pay Less taxes in Retirement”which can also add to your knowledge.
The tax-preferential treatment provided to life insurance allows an individual to have greater flexibility over which dollars to use during retirement, and depending on the type of life insurance, it can also provide a non-correlated asset to the portfolio providing additional diversification.
The tax-preferential treatment of life insurance can be especially advantageous for individuals in a higher income tax bracket or as a hedge against a rising tax environment. As taxation rises, tax-free cash flow becomes more advantageous and, at the same time, help manage taxes.
Start the process today by doing your due diligence. Determine your specific life insurance needs, talk to an independent fiduciary advisor, and review the companies offering life insurance policies before you purchase. Remember, life insurance can provide more than just protection during the working years. It can continue to provide protection and benefits throughout retirement.
If you would like us to review your current policies or discuss this strategy in more detail please contact us at info@commonfinancialsense.com.
