Leaving a Legacy vs Retirement Income: How Whole Life Insurance Solves Both

Traditionally life insurance has been used to solve estate tax and business succession issues for the wealthy. This article addresses the non-traditional uses for permanent life insurance.

Most people see insurance as a cost, not as a tool to help them with their success. Not a place to put money into for its value. Yet, life insurance, correctly planned, is a tool for success for the following reasons:

Whole life insurance provides real value for the policy owner who owns the policy throughout their lifetime. Here’s why; as we plan our life financially we must look at decisions we make regarding money based upon how it will impact our lives. Not only while we accumulate money, but during the next two phases of life; wealth distribution (retirement) and wealth conservation (estate planning).

Life insurance takes on a new role at retirement. It becomes asset insurance. This is the time that most people think you no longer need life insurance. For instance, if we arrive at retirement with four million dollars and we utilize traditional financial thinking and withdraw interest/earnings on the account of 4% we would generate $160,000 per year. That $160,000 would be taxable at their tax bracket. Let’s use 35%, which means there would be a tax of $56,000 leaving a net income of $104,000 per year, every year, until he or she dies. And the retiree will have left $4,000,000 to their children, charity, etc. If the person needs more than $104,000 a year he will need to dig into the principal, earn less in interest in the following years, and consequently leave less behind in his legacy.

A good analogy is that the 4 million dollars is in jail. He cannot enjoy it for if he spends it, it would deplete and the interest would go down. He has to toggle between the lifestyle he wants to enjoy during retirement and the legacy.

Now let’s compare that with your client owning permanent life insurance at retirement age 65. This individual arrives at retirement with the same four million in cash, but also owns four million of permanent life insurance. An equal amount of money but allocated differently. What would be the result?

Well, to start with he does not need to be concerned about eating into his legacy. That is taken care of. But he also doesn’t need to be too concerned about eating into his principal. In fact he can take an annual net income more than twice as much as the chap without insurance each year for 20 years! He can live to enjoy that money. He can spend more and enjoy more during his retirement.

The “Trade-Off” Between Leaving a Legacy and Retirement Income

There are more choices and security for the person who uses life insurance as part of their retirement. Here’s why: If you look at retirement planning and estate planning there is a battle that exists between one’s lifestyle and one’s legacy. By developing a plan that includes life insurance, whole life, you may be able to create the best results for both your lifestyle during retirement as well as the legacy you leave behind. Let’s look at this from a conceptual perspective.

The chart represented in this attachment looks like a choice (click here). In fact some people have gone as far as placing a bumper sticker on their car that says “I am spending my children’s inheritance”. This is the “see-saw” effect. He has to trade off between more money for retirement and a smaller legacy or a larger legacy and less money to enjoy retirement.

Most do not recognize that there is another way. And the beauty of it is in its simplicity. What if you can have both the maximum legacy and the maximum retirement income? What if both can be accomplished without the negative impact on the other. What if both can be realized despite the many potential risks and eroding factors that exist in our economic climate today. Retirees need to rethink the positions of their assets, so their plans results are good.

Whole Life Insurance does exactly that. Using the same base number as above, this 65 year old retiree has 4 million dollars when he hits retirement but also has a 4 million dollar whole life insurance policy. As he does not need to worry about eating into the legacy portion, he can live off both the interest and the $4 million principle. Assuming this person will live another 20 years after retirement to the age of 84, he could take a gross income of $294,000 per year compared to the person without Whole Life Insurance who can only take $160,000. And he will be paying less in taxes giving him between $238,000 and $290,000 to spend every year for the next 20 years.

In this example, the person without permanent life insurance will be able to spend over a 20 year retirement, after taxes, $2,080,000. The person with life insurance will have $5,226,217 to spend after taxes. Both still leaving $4 million in their legacy. Click here for a graphic representation showing the annual withdrawal, taxes and net income for both individuals.

A good financial plan needs to provide income for many years. For instance joint life expectancy of a healthy 60 year old couple is 94. So the income needs to last for a very long time. And during that period the income needs to be protected from:

1. Inflation;
2. Taxes and the potential of increased taxes;
3. Market downturns and volatility (and the effect of withdrawing money from a portfolio that declined or is declining);
4. Healthcare costs and long term care;
5. The economic needs of children.

All of these factors significantly impact the probability of success for the retiree.

Having whole life insurance as part of a portfolio significantly impacts the options, choices and flexibility for the retiree. As the individual who planned their life with whole life insurance can consume, spend, enjoy and gift their wealth knowing that a safety net exists to provide for legacy value, they can have a greater chance of enjoying their wealth, because consuming their principal will not be at the expense of depleting their legacy while their other assets can be enjoyed for retirement.

Once the client begins to recognize the value of this type of planning process the light bulb goes on and they begin to see whole life insurance as a tool to help with their overall success rather than a cost. Instead they will see it as a financial asset that creates a unique package of benefits that allows the insured to spend and enjoy his/her assets in a way that does not exist in the traditional ways most approach retirement planning.

This is just one example of the benefits of Permanent Life insurance. In advising your clients on what is best for them, it is important to understand their needs, their desires and most importantly what they want their money to do while they are still alive and what they want their money to do once they are no longer around.

Knowing your tools and which one is right for your client also requires that you as an advisor, know the different products out there and the benefits and drawbacks of each. You are welcome to contact me at michael@michaelfliegelman.com for ideas and recommendations on succeeding in your practice.

Michael first published this article in www.producersesource.com