3 Insurance Policies That Can Help Pay for Your Retirement
Financial planning is an important part of life and one that many of us tend to overlook or not fully understand. When planning for your retirement, what do you immediately think to do? Most people would plan for retirement by funding their 401Ks and then using financial vehicles such as mutual funds, bonds and securities to save money. However, there is also life insurance that can help in your planning efforts. After reading an article, entitled, “Three Insurance Policies That Could Help Pay for Retirement,” I wanted to share what I learned with family, friends and you – my reader. So, here we go.
Did you know that there are some forms of life insurance that can provide funds in your senior years? “In most cases life insurance is probably not appropriate until all the tax qualified plans – IRAs, 401Ks, etc. – have been maxed out and one doesn’t have any more of those vehicles to invest in,” says Rob Drury, executive director of the Association of Christian Financial Advisors, a non-profit coalition of over 3,000 financial advisers in San Antonio. But if you’re looking for a boost, here are the three insurance options.
The best part about annuities is that they grow tax deferred but are fully taxed at your tax bracket when you take money out. Variable annuities let you invest in accounts similar to mutual funds, and the money grows tax-deferred until it’s withdrawn. “Inside the annuity you may have an interest-bearing account or mutual funds that give you the opportunity for a higher rate of return. There are also indexed annuities that limit any losses, but also may limit future growth,” says Sheldon Weiner, founding partner at the financial planning from Egan, Berger & Weiner LLC in Vienna, VA.
Guaranteed Minimum Withdrawal Benefit (GMWB) allows you to withdraw up to a certain amount each year beginning at the initial investment for the rest of your life, no matter how the investments perform. Even if you deplete the account, the insurer will still pay the guaranteed amount. This definitely makes Annuities an attractive insurance vehicle for retirement.
When is the best time to buy a variable annuity? It is when the market is high and you want protection against a fall. When you purchase a variable annuity in a strong bull market, they do well. However, if you purchase one in a bear market, or they’re owned in a severe bear market, your investment will likely do poorly.
Annuities are not necessarily right for everyone. They limit liquidity, have surrender charges if you want to abandon them, and can carry expensive fees. “They may be right for people who don’t have enough Social Security or pension income or those who cannot sleep at night because of worries about the stock market,” says Weiner.
Permanent Life Insurance
Permanent life insurance accrues a cash value of the life of the policy. Term life insurance doesn’t accrue cash value and simply pays a death benefit. Unlike term life insurance, permanent life insurance has a cash component that builds up over time, and the policy owner can even take a loan against the cash value.
If you can hold your permanent life insurance policy for decades, giving the cash value a chance to build, you could end up with a very nice nest egg at retirement. Even if you never use the cash value, you will still have the life insurance if you pass away. Plus, the cash that builds in these policies is not taxed until it’s withdrawn, and you can avoid those taxes by taking a loan against the account, which will reduce the death benefit. This is the main advantage.
You will want to be careful of the lapses that may occur with your policies. Drury says, “Critics will say, ‘You’ll pay interest and also you’re removing cash value and putting the policy at risk of lapsing.’ There’s some truth to that.” So, how can you prevent a lapse? When a policy lapses and you’ve borrowed money from it, the IRS will look at that withdrawal as income, making it a taxable event. Permanent life insurance as a retirement fund may make sense for high earners who have maxed out their other tax-deferred savings. It may also benefit older individuals who have liquid estates, such as small business owners who want to leave their money to someone, but the death benefit is more than they’d be able to save. It is also beneficial for anyone in a position to retire early, in their 40s or 50s (before they can access qualified plans) because there are no age restrictions to funding life insurance. This strategy isn’t for people who are within 10 to 15 years of retirement.
Drury also says that within the last 15 to 20 years, “the interest on the loan is a little bit higher than the earnings on the cash values. It used to be a wash. You earned about as much as you were paying – you were basically accessing that money for free. It’s still pretty darn close.”
Return of Premium Term Life Insurance
Return of Premium (ROP) Term Life Insurance policies are a special variety of level term policies. If the customer hasn’t passed away during the term of the policy, he or she will get all his or her premium money back. You do pay considerably more in premiums for this option than you would for a regular term life policy though.
The key when considering term insurance is to look at the difference in the premium of what you would have paid on a regular term policy versus an ROP, and then see if you can invest the difference and get a better rate of return. Visit Genworth Financial for more information on managing your money.