Coming out of a bankruptcy or losing a high paying job, people are often put back to square one in a financial sense. As a result, perhaps all of their saving are lost, or even worse, their retirement nest egg. Often they are digging out of a massive financial hole, and in doing so, the client needs to make very hard financial decisions.
Unfortunately, clients sometimes only consider the short-term financial issues, such as paying the heating bill or making the car or house payment. But the reality is that they also need to look further down the financial road and not forget that someday they're going to permanently lose their earnings and retire... hopefully.
Relying on 401(k) for Retirement
Back 30- to 40-years-ago, the majority of your retirement income came in the form of an employer provided pension. With the mass acceptance of the 401(k) in the 1980's, many companies have since dropped their pension and encouraged employees to invest in the self-directed 401(k) plan. We work with a lot of financial advisors that have clients that have basically lost the majority if not all of their retirement savings in the market corrections of 2002 and 2008. With so many people invested in a 401(k) where their returns are based on the performance of the market, when the market drops, the value of the retirement account also drops. In that situation, many people feel that they've lost everything, because so much of retirement planning today is done by the individual and not the company like years ago.
Running Out of Time
When market corrections occur when clients are in their 20's or 30's, they have plenty of time to recover. But when the correction occurs in their late 50's or early 60's, it can mean basically one of two options, neither of which is very desirable. First, the client can decide not to retire in order to allow enough time for the market to rebound and increase the value of the retirement account. The second option is to simply retire and accept a lower standard of living in retirement because their retirement account balance doesn't allow them the flexibility to get out and truly enjoy their golden years.
Indexed Products with Market Protection
How can you help your clients avoid and recover from financial hardships? What many financial professionals and insurance agents have done to help offset or eliminate these market corrections from devastating a retirement account is to encourage clients to explore alternative ways to prepare for retirement. These advisors recommend specific insurance products that eliminate market volatility, yet provide an interest crediting mechanism that keeps pace with the market, and these products are called Indexed Annuities and Indexed Universal Life.
Advantage of Avoiding Market Losses
Most indexed insurance products such as Indexed Annuities or Indexed Universal Life are not securities. Instead they are fixed insurance products, which means the client does not directly invest in the market. In addition to offering a fixed interest rate, the insurance company also offers the client the opportunity to earn interest in excess of the fixed rate based on the overall performance of a market index, such as the S&P 500, up to a cap declared by the insurance company. So for those individuals who do not have the stomach to watch their retirement nest egg go up and down in value, these products help offset that fear and allow clients to sleep better at night.
Disadvantage of Caps on Performance
The downside of these products, is that your earning potential is limited to the cap declared by the insurance company. So if the market rebounds and goes up 20 - 25%, the client would only see a portion of that recovery. The flip side of that argument is that because it's a fixed product the client also misses the devastating losses, and over a long period of time, the indexed insurance products keep pace with the market.
401(k) Rollovers into Guaranteed Income Products
While investing in an indexed annuity doesn't provide any additional tax advantages over the traditional ways people save for retirement, what many of these products do offer that is vastly different is the ability to take your defined contribution 401(k) plan, and essentially convert it into a guaranteed defined retirement income stream. Through the use of various "lifetime benefit riders," the client can rollover 401(k) balances into these products and assuming they don't touch their account until retirement, it will grow and the client knows with 100% certainty how much guaranteed retirement income it can produce, regardless of how the market performs. Knowing that you have a guaranteed income in retirement, for the rest of your life, regardless of how long you live, is the equivalent of creating your own pension. Knowing your retirement is secure can be very comforting.
Market Gains with a Death Benefit
Another product that provides even more financial benefits is Indexed Universal Life insurance (IUL). As a life insurance product, it pays a tax-free death benefit to the client's family. Using life insurance as part of a comprehensive plan makes sense because first and foremost it protects the client's family from the devastating financial hardship that comes with a premature death. However, when the product is properly structured and funded, it can also provide outstanding living benefits the clients can use during their lifetime. Being properly funded and structured often means choosing the least amount of death benefit allowed under U.S. tax codes relative to the amount of your premium payment.
Tax-Free Distributions with Loans
When the client has a properly structured and funded life insurance policy, the tax codes that govern life insurance allows the client to take money out of the policy at any time without tax penalty. So when an emergency arises, money can be withdrawn or loaned from the life insurance policy without tax penalty. This can be a significant benefit over other traditional retirement accounts such as a 401(k). When you consider that an Indexed Universal Life policy also eliminates the market volatility, yet provides the mechanism to earn a competitive interest the product is becoming one of the most popular insurance products in the market today.
Comprehensive Retirement Plans
When clients have already gone through one significant financial hardship, they certainly don't want to go through another one, especially when it impacts their retirement. They need to understand that there are financial vehicles available that can minimize the market risk, allow them to make unrestricted contributions to the product, and when necessary take out money in an emergency without penalty. When the products are a fit for your clients, consider using indexed annuities and indexed universal life insurance as a part of their comprehensive plans.
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