LifeHealth.com
Retirement Fuel Efficiency: The Reward for Good Behavior
by Maria Umbach
Maria Umbach is Vice President and Chief Marketing Officer, Individual Markets for The Guardian Life Insurance Company of America, New York, N.Y. She can be reached at maria_umbach@glic.com.
They say that slow and steady wins the race. That is as true with the tortoise as it is with financial products. One of the most powerful financial tools on the market today is one that has proven steady over many decades – whole life insurance.
Whole life insurance has lost some of its luster in recent years. Misconceptions fueled by popular media over the last 20 to 30 years have clouded the true value of whole life insurance. Yet the granddaddy of life insurance remains as attractive an option today for its unique combination of asset protection and wealth accumulation as it was when Congress gave it special tax treatment in 1913, an incentive for individuals and business owners who were expected to take more responsibility for their financial futures.
Whole life's built-in guarantees and tax benefits, including a tax-free death benefit and tax-deferred accumulation, make it an attractive product.
Building a sound financial strategy
Term insurance has risen in popularity over the last 20 years with the popular newsstand mantra, "buy term and invest the rest." The problem with this strategy is that most don't invest the difference.While life insurance is often considered an "expense" solely for death benefit protection, it is actually an asset that adds a more holistic layer of financial security than other planning tools through its combined living and death benefits features.
Boosting retirement spending power
The national savings crunch coupled with the decline of defined benefit pension plans means that clients must take more individual responsibility for ensuring their financial security during retirement. The presence of a guaranteed death benefit to ensure the legacy value can free up other retirement assets to use during life. Depending upon when one acquires whole life, that bump in spendable retirement income can be anywhere from 10 to 30 percent or more. The stable cash value returns add yet another source of potential retirement income.
In addition to acting as a crucial retirement supplement and during a time of increasing life expectancy rates, many whole life policies now come with accelerated death benefit riders that pay out part of the death benefit for those in need of long term care. Though this feature is not a substitute for long term care insurance, it does behave in much the same way. Most policies likewise offer accelerated benefits should you become terminally ill.
Living benefits: the lifestyle factor
In addition to acting as a crucial supplement to retirement, these policies can provide an income stream that allows clients to spend down other assets while they're still living and fulfill a variety of financial commitments such as financing a college education or caring for aging parents. Unlike borrowing against a 401(k) or bank financing, whole life policy loans against the cash accumulation aren't subject to restrictions, credit checks or penalty fees. Any amount that isn't repaid will be deducted from the death benefit and cash-surrender value. Further, the dividends generated by whole life can be used to pay down premiums or increase the policy's death benefit.
"Buying vs. Renting"
When approaching clients, a helpful analogy to bear in mind is buying versus renting. For some people, like those living paycheck to paycheck, it will be best to rent their insurance with a term policy, a cheaper alternative offering only death benefit protection if one happens to die during the coverage period. For others, however, owning their insurance with a whole life policy will provide clients the financial peace of mind of the stability, flexibility and permanence of a guaranteed death benefit. Whole life insurance, like owning a house, offers an opportunity to grow value over time. People who are more asset-oriented are likely to select whole life and commit to fulfilling its lifetime promise. Taking that analogy further, the "equity" generated through cash accumulation and dividends can be used during one's life.
Asset protection
As clients enter retirement, views shift from lifestyle to legacy. The guaranteed death benefit protection offered through whole life allows clients to safeguard their assets at the time of the their death. Estate taxes can wipe out the accrued value of retirement accounts, real estate and businesses by forcing beneficiaries to liquidate assets. Whole life's income tax-free, guaranteed death benefit can cover the bill and protect the wealth a holder has worked to accumulate.
From a wealth-management perspective, owning a whole life policy would give a retired couple at age 65 living in a home worth $1 million the freedom to take out a reverse mortgage using the death benefit to replace that consumption upon their death. Those same benefits would help a 70-year-old male retiree pay a $24,000 annual tax bill on a property he owns outright without fearing foreclosure for his beneficiaries after his death if he had borrowed against the home.
While whole life comes with higher dollar commitment than term life insurance, it offers a much greater value over the long term when taking into account the internal rate of return of total premiums to death benefit at life expectancy. Even without consideration for the death proceeds, the cash value returns alone could average the same or better than other conservative investments.
Learn from the pros of perpetuity
As record numbers of people are entering the retirement years, many are concerned with how their legacies will outlive their life spans. Many major corporations and banks have used permanent life insurance as an asset to continually fund benefit plans and boost financial results for the long term longevity of the company. They are a prime example of positioning permanent life insurance as an asset class that serves a very important purpose in a portfolio.
Succession planning
The proceeds from a whole life policy can be a valuable resource for small business owners whose most valuable asset are their employees. Whole life insurance can be used to fund Key Person insurance and Buy/Sell Agreements that can protect a business from monetary losses caused by the death of a key executive or employee.
Insurance for your whole life
The biggest advantage of whole life insurance is in its name. The death benefit for beneficiaries is permanent. In an age of increasing life expectancies and extended retirements, having an insurance product that will stick with you during your golden years is a significant advantage and one not found with other life products.