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4 Ways Clients Can Use Life Insurance in a Retirement Income Strategy

Posted by Mark Triplett, CEO of Triplett-Westendorf Financial Group on Wed, May 06, 2020 @ 12:00 PM

When I think of a retirement strategy, the first thing that comes to mind is often the accumulation of assets and investing strategies. As a fiduciary investment advisor developing and implementing retirement income strategies for my clients, I’d argue that investing is the easy part of the process. Here's what I mean...


Identifying and neutralizing the many retirement risks that people will face throughout the remainder of their lives is the greater challenge. Wrestling with longevity, market risk, order of returns risk, taxes, and costly, yet unforeseen long-term care events could all be very damaging to most clients lacking a comprehensive strategy.

A well-balanced retirement income strategy addresses these risks, and strives to eliminate or at least mitigate them. Many of these retirement risks cannot be eliminated or mitigated through proper asset allocation and investment strategies. They need to be dealt with through the transference of risk from the individual household to the collective. That involves insurance products, and life insurance is one of the strongest insurance tools and includes many practical uses.

Life Insurance is a Tool

The broader category of life insurance may be broken down to several subsets. Life insurance products fall into specific categories determined by the intended use. Life insurance, after all, is a tool. Like many other tools, specific jobs require a specific tool. Busting concrete requires a sledgehammer, whereas driving a tack nail requires something a little more delicate. One insurance contract may be best for inexpensively protecting against the effects of losing an income stream tied to an individual, while another policy may be well suited for transferring wealth in a tax efficient manner. Different jobs, different life insurance products. 

1. Inexpensive Protection From Loss

When I'm building a retirement income strategy for clients who are not retired, my expectation is that one or both of the individuals benefiting from the strategy will continue to work and earn an income until their desired retirement date. They maintain their lifestyle now, contribute to the savings strategy, and the retirement strategy we’re developing will replace that income at a predetermined desired date.

Often times, in order for the strategy to fulfill its purpose, the income earned prior to retirement is critical. It will help provide a lifestyle during the working years of clients and allow them to save for retirement. It also allows their savings to grow uninterrupted by withdrawals. If an income-earning individual is unable to produce income because of death or disability, the negative impact on the overall strategy may be huge.

Term life insurance may be used to mitigate the risk of loss of income from an earner so that the strategy is still fulfilled. Often times, we’ll see one spouse’s desire to take care of the other spouse as a priority, ensuring that even if their income is not available any longer due to death, their spouse will be able to enjoy the lifestyle that they have worked so hard for.  Term life is a practical and inexpensive way to help reduce this risk.

2. Tax Strategy Tool

One of the challenges to overcome with a retirement income strategy is dealing with taxes. Many people are surprised to learn that their pre-tax contribution and tax deferred earnings within their retirement accounts will be taxable as regular income when they make withdrawals. Accounts such as IRAs, 401(k)s, and other IOUs to the IRS are "forever taxable" accounts. As inflation increases the cost of maintaining a desired lifestyle, retirees may be forced to make larger withdrawals from these strategies. They may be surprised to see taxable income could increase sharply over time. Many have - and many will - underestimate the impact taxes will have on their retirement assets.

One useful strategy that incorporates tax-free income is to use a properly structured and properly funded cash value life insurance policy. Whole life and universal life, including indexed universal life or variable universal life, are potential tools for the job, if the person has a need for life insurance as the death benefit if the primary purpose for purchasing a life insurance policy.

Section 7702 of the Internal Revenue Code under current tax law permits policy owners to contribute excess premium towards the cash value of the policy, grow it in a tax-deferred manner, and access it tax free through properly structured loans and withdrawals.

Distributions from a properly structured policy are not only federal income tax-free, they do not get included into the provisional income calculation - the calculation used in determining whether your social security income is taxable. 

When tax-free distributions from a properly structured and funded life insurance policy are blended together with distributions from pre-tax retirement accounts, the annual tax liability of the strategy can be reduced, while increasing the income available to maintain the desired lifestyle.

3. Efficient Wealth Transfer

Many people desire to leave a legacy. It’s natural for us to want to leave something for the next generation. While some people may feel more strongly about leaving a legacy than others, often times there will be something left over when we’re gone. Leveraging life insurance to leave a legacy allows clients to spend pennies in order to leave tax-free dollars, in the form of a death benefit, to their beneficiaries.

Permanent life insurance policies like guaranteed universal life policies provide an attractive option. They may be able to satisfy a client's desire to leave a legacy, while freeing up retirement assets to be used for the enjoyment of the policy owner. Many of the insurance products designed for wealth transfer available today also permit the policyholder to access some or all of the death benefit while they are alive in order to offset the costs associated with a long-term care event or chronic illness.

4. Asset Based Alternative to Traditional Long Term Care

One of the retirement risks to deal with inside of a comprehensive strategy is the potential disruption of the strategy by an unexpected long-term care event. An average 65-year-old person has a 70% chance1 of experiencing a long-term care event during his or her lifetime. That doesn’t necessarily mean that person will end up in a nursing home, but he or she is likely to need some level of assistance for some period of time during his or her lifetime.

Some life insurance policies today offer an alternative to traditional long-term care insurance. Universal life and whole life policies have been designed with features that allow the policy owner to access the death benefit, and in some cases purchase a rider, to provide a continuation of the benefit even after the death benefit has been exhausted to cover the cost associated with a long-term care event.

With traditional long-term care insurance the policy owner could pay tens of thousands in premiums over decades and then never use the benefit. By combining life insurance and features of traditional long-term care insurance into one policy, the policy owner is assured to receive some level of benefit. The policy owner is either going to use the asset based alternative products for offsetting the cost of care while they’re alive, or leave a tax-free legacy to the beneficiaries. 

Cost-Effective Supplemental Retirement Income

Some of these products even offer the ability to get some or all of the premium back during the lifetime of the policy owner if they decide the policy no longer serves their needs. Policy owners know they have one of three outcomes: They’re going to use the policy to offset the cost of care, die with it and leave a tax-free benefit to the beneficiaries, or quit the policy altogether and get their premiums back.

Life insurance may not be the first product that comes to mind when thinking about retirement, however the variations of life insurance can play several significant roles in contributing to the overall success of a retirement income strategy. Transferring risk from the individual household to the collective is one way to eliminate or sufficiently mitigate many of the retirement risks a strategy must hold up against. It's one of the most effective tools in the hands of a professional who knows how to use it, alongside all of the others tools, to build a lasting and successful retirement strategy. 

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Tags: IUL (indexed universal life insurance)



This content is for informational and educational purposes only and is not designed, or intended, to be applicable to any person's individual circumstances. It should not be considered as investment advice, nor does it constitute a recommendation that anyone engage in (or refrain from) a particular course of action.