Many people do not view life insurance as an essential part of a retirement income plan. Life insurance is typically seen as a way to protect families from the early loss of a breadwinner during the working years. However, financial advisors recommend life insurance as it has the potential to be so much more if properly utilized in a comprehensive retirement income plan.
To understand how this work, let’s have a look four different types of life insurance plans — Unit Linked Insurance Plan (ULIP), Whole Life Plan, Endowment Plan, and Retirement Plan.
A Closer Look at Each Life Insurance Plan
Unit Linked Insurance Plan (ULIP)
It is a combination of insurance and an investment. The insurance company will invest your premium to provide your insurance life coverage and invest the remaining capital in various investment opportunities.
They will allocate the capital based on how much risk you are willing to take with your investments. Some of the opportunities to invest they will present you with include debts, bonds, market funds, equities, and hybrid funds.
Whole Life Insurance
It provides you coverage for life or up to the age of hundred years. In the event you pass away before the investment matures, the capital will be paid to your dependent. On this plan, you can withdraw part of your investment or receive regular money after the premium payment tenure ends.
This is a long-term savings plan that utilizes half of your premium to offer you life coverage. If life coverage lasts throughout the tenure of the endowment plan, the insurance plan will give you a maturity or survival benefit.
If the life coverage does not last throughout the tenure of the endowment plan, your surviving dependent such as your partner, will receive the capital. By opting for this plan, you receive a chance to make additional money from time to time, which is paid to you when the plan ends or to the specified dependent on your passing.
A retirement plan is designed to meet your retirement needs. The retirement plan allows you to develop a retirement plan in a cost-effective and secure manner. The retirement plan is divided into two phases — accumulation and annuity.
Accumulation Phase — In this phase, the insurance company will ask you to pay your premiums throughout the tenure of the insurance plan. The insurance company will invest the premiums you pay them in securities. In short, they are investing your payments and with time, your investment will grow and result in revenue for you.
Annuity Phase — In this phase, your investment will grow. You will begin to receive returns on your investment. When the insurance plan matures or when you retire, you will begin to receive a regular income.
Most insurance companies require the person to be between the ages of 50 to 70 years. During the second phase, you can withdraw up to 30 percent of the generated capital at one time. The insurance company will use the remaining capital to invest in an annuity plan.
During the second phase, you will receive a regular pension depending on the annuity and the mode option you selected at time of signing up for it. For instance, you can opt to receive a pension on a monthly, quarterly, six months, or on an annual basis.
Tips to Use Life Insurance in Your Retirement Planning
It is important for you to select the right life insurance coverage, one that checks all your boxes post-retirement. You want to benefit from life insurance policy after you retire, which is why you need to make retirement planning a part of it.
To help you make the right decision for you and your family, here are tips on how you can use life insurance in your retirement planning:
1. Make Life Insurance Part of Your Financial Plan
Life insurance ensures your dependents such as your partner and children are looked after in the event of your death. By making life insurance a part of your insurance plan, you secure yours and your family’s future.
You want the payouts you receive from the insurance plan to cover debts and loans such as mortgage and car payments. Your dependents will be able to use the money to fund their education for instance, as they no longer can depend on your income.
If your partner does not work, they need to have enough money to manage the house and children. People who pass away before they are yet to retire can still provide for their family after their passing by opting for life insurance.
Life Insurance is the Perfect Retirement Savings Method
Life insurance offers financial protection for the dependents in the event you die before you can generate sufficient savings. Life insurance’s low and fixed price allows you to create an emergency fund, as it frees up your disposable income. You can invest in long-term disability insurance and begin investing in low-cost investment opportunities.
The Duration of the Term
The insurance company will ask you to buy a duration. To decide the tenure of the duration, you need to consider how long it will take you save up money for your dependents to live a comfortable lifestyle when you are gone as well as your age. For instance, if you are older than the age of 65, you will more likely not qualify for the term.
The Amount of Life Insurance You Should Carry
The amount of life insurance you should sign up for depends on how much debt you have accumulated up till now, the amount of capital you need to pay it off, and if you have any duties and responsibilities that you need to fulfill such as paying for your child’s college.
Getting Life Insurance through Your Employer
If you receive insurance through your employer, it may not be sufficient enough to take care of your dependent’s every need. You might need to buy your own life insurance. Another reason why you might want to buy a separate insurance policy is due to the unpredictability of the job market.
You might lose your insurance through your employer if you lose your job. By buying a separate insurance policy, you have the comfort of knowing that as long as you pay your premiums, the insurance policy will get renewed.
2. Invest in Long-term Disability Insurance
Do not depend on your Social Security to receive disability benefits. If you have been diagnosed with an illness or have sustained an injury that keeps you from working, you will discover that qualifying for benefits from your Social Security is not easy and if you do qualify, the money you will receive may not be enough to run your household.
Your retirement planning should consist of long-term disability insurance. You can select from two policies — own occupation coverage and any occupation coverage. Opt for the first one because it will offer you a comprehensive coverage.
In the event you are unable to work in your own field, the own occupation coverage will replace the income you would have earned as an accountant for instance than as a retail employee. Even if you do not have anyone to support, you still need to apply for long-term disability insurance. If you are unable to work in your own occupation, you will receive enough income to maintain your household.
Tip: To avoid having the cost of your premiums increased or having to requalify for it, look for a non-cancelable and renewable coverage.
3. Use Term Life Insurance for Retirement
You need term life insurance for retirement. To use term life insurance in your retirement planning, you to invest the remainder of your money into the insurance. Even though you can opt for a permanent life insurance policy, you should not invest the capital yourself through a brokerage firm.
Why Should You Not Apply for a Permanent Life Insurance Policy?
A permanent life insurance policy has a cash value element. It generates savings for you, which you can invest later. However, by investing the money through a brokerage firm, you will receive more freedom on where you want to invest the money.
You will not have to pay the fees such as policy and agent fees associated with a permanent life insurance policy. The performance of your investment will not depend on the financial performance of the insurance company and you will not have to invest in selected investment opportunities offered through them.
Establish a Tax-advantaged Retirement Fund
At the brokerage firm, you can establish a tax-advantaged retirement fund. Ensure the tax-advantaged retirement fund at a brokerage firm that offers the lowest possible investment fees. In doing so, you will be able to create a diverse investment portfolio, consisting of exchange-traded funds, index funds, or target-date funds.
Life Insurance Strategies to Consider When Planning Your Retirement
If you want to use your life insurance in your retirement planning, here are some strategies to consider:
Allow Your Term Life Insurance Policy to Expire
You purchase a term life insurance policy to protect your children, if you have any. When your children grow older and leave the nest, the term life insurance policy expires. Your insurance company may tell you to renew your term life insurance policy by replacing it with another policy.
Do not replace your term life insurance policy with another insurance policy, but allow it to expire. Instead, save the money. Your partner will be able to use your pension benefits, Social Security benefits, and retirement benefits to provide them with steady income each month.
Allow the Case Value to Become Tax-deferred
If you bought whole life insurance or permanent life insurance, by now, you have probably produced an impressive cash value. If you opted for the whole life insurance policy, a tax planning and retirement benefit you receive is that the cash value becomes tax-deferred.
The Internal Revenue Service (IRS) sees insurance policy payments that produce cash value as a return of the premiums you paid during the duration of this policy. You pay taxes on those payments when the total payments become more than the total premiums you paid.
You will not have to pay tax to the IRS until you end the insurance policy. You should let the cash value grow and then give up the insurance policy when you require tax-free income.
Pay Premiums with Dividends
If you want to keep your old whole life insurance policy so you can receive tax-deferred income or when you pass away, you should use the coverage’s dividends to pay off the premiums. In doing so, you receive instant cash flow. The dividends offer you tax-deferred growth and you receive enough of them to pay off your premiums.
Take Money Against the Cash Value
When you pass away, your dependents receive the money, but they do not receive the cash value. That is why you should use the cash value in your lifetime. You can borrow against the cash value and repay the amount you owe. However, you can only do this if the amount you borrow with interest does not surpass the cash leftover in the insurance coverage.
If you are thinking of borrowing against the cash value, you need to understand the concept of phantom income. You will be charged a huge tax amount if you end your insurance coverage and the amount you borrowed equals your cash value. They will tax you on the amount that surpassed the premiums you paid off.
Convert Your Whole Life Policy into Life Annuity
You need to convert your whole life policy into life annuity. You can do that by using the cash value to buy life annuity. When you convert your whole life policy into life annuity, you will not have to pay a lot of tax. Before you do this, you need to consult with your insurance company if doing this is possible.
Invest in your family’s prosperous future by using life insurance in your retirement planning.
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