Most families are concerned about retirement and what they will leave behind for their loved ones when they are gone. Will they have enough income to maintain their standard of living in retirement? Will they have to work into their 70s to afford retirement? Will they ever be able to retire? Will they be able to leave something to their family or favorite charities? If you are helping families to navigate retirement and legacy, how can you help them feel more confident and worry less about their financial plan? More guarantees! Adding whole life insurance to a retirement plan can reduce your clients’ risk of outliving their retirement income, while providing a higher standard of living in retirement and ensuring they will leave a legacy for their loved ones and/or favorite charity. Whole life insurance has some of the strongest guarantees in the life insurance industry. Guaranteed premiums, guaranteed cash value growth, and guaranteed death benefits can provide a foundation on which to build a solid retirement and legacy plan. In this article we will discuss how the attributes of whole life insurance can help to achieve retirement success, address the limits of Social Security and dangers of market volatility, along with the threat of becoming disabled.
Social Security provides a supplement to retirement income, but it was not meant to stand alone. According to the National Institute on Retirement Security, full Social Security benefits replace about 40 percent of the typical retiree’s income. Therefore, many financial planners recommend what is known as the three-legged stool for retirement success. The three-legged stool consists of Social Security, a pension plan, and private savings. Unless you work for a government entity, you are unlikely to have access to an employer funded pension plan. For those families, private savings becomes even more important for retirement. Whole life insurance may be a great place to allocate some of those funds. The guaranteed cash value growth and non-guaranteed dividends in a whole life policy grow income-tax deferred, and can be accessed income-tax free. Whole life insurance cash values may be accessed prior to retirement age for any reason and without a penalty. Cash values in a whole life policy could be used to reduce the gap left by disappearing pension plans. Additionally, the current age to receive full retirement benefits is 67. Those who wish to retire a little earlier than full retirement could use whole life cash values to bridge the gap. Indexed universal life can serve as another option for an income-tax free retirement supplement. Both whole life insurance and IUL have the same advantages regarding income tax treatment. IUL provides the opportunity to capture higher cash value growth in the long run by tying the interest earned each year to a stock index like the S&P 500. The potentially higher returns in the long term could be used to provide a larger pool of cash value to bridge the gap between early retirement and full Social Security benefits and supplement retirement income. While there is room for both, whole life guarantees, and the resulting predictability, are what could make it a great foundation for a financial plan. IUL insurance is still tied to movements in the stock market. The guarantees in whole life insurance means the cash values are more predictable and consistent. These can be important qualities to provide a true buffer against market volatility. This buffer against volatility becomes increasingly important as your client approaches and enters retirement.
Many clients approaching or in retirement will continue to invest in volatile assets like stocks. You might have heard the investing rule of thumb that states that the percentage of a client’s retirement investment portfolio that should be invested in stocks equates to 100 minus their age. For example, 100 minus 55 years old means 45 percent of their investment portfolio is recommended to be invested in stocks. Many close to and in retirement continue to invest in stocks because they tend to produce higher returns over the long term than less risky assets like bonds, savings accounts, CDs, etc. Assets that are able to produce returns that potentially outpace inflation are a necessary part of many portfolios well into retirement to reduce the risk that a retiree will outlive their personal savings. However, when a client is close to or in retirement, they are susceptible to “sequence of returns risk.” This means a substantial decrease in the value of a client’s stock portfolio can dramatically impact or derail their retirement plans. Remember the “dot com bubble burst” in 2000 and the financial crisis in 2008? The market recovered in both cases, but it took time and delayed or derailed retirement for many Americans. Wade Pfau, Ph.D.,CFA is a professor of retirement income at The American College of Financial Services. He authored a white paper titled Integrating Whole Life Insurance into a Retirement Income Plan. In his paper, Dr. Pfau demonstrates how adding whole life insurance and income annuities to a retirement income plan can help retirees have a higher standard of living in retirement, leave a bigger legacy, and increase the likelihood their retirement savings will last a lifetime. Since whole life guaranteed cash values grow, regardless of movements in any other markets including stocks, whole life can help protect clients from sequence of returns risk. By taking a retirement income distribution from, or loan against, a whole life policy’s ever growing cash values, the more volatile assets like stocks can recover more quickly and support a higher income distribution throughout retirement. While sequence of returns risk is of great concern near and into retirement, the threat of becoming disabled is a life-long risk.
Life insurance can serve to replace an insured’s income if they die prematurely. However, we are more likely to become disabled for a period of time than we are to die. This is true every year of our working lives. According to the Social Security Administration, a worker between the ages of 20 and 67 has a 25 percent probability of becoming disabled. During the same period, the probability of a worker dying is 13 percent. The probability of becoming disabled during working years is about the same for men and women. The possibility of becoming disabled is an obvious threat to a successful retirement. Products like disability insurance are designed to replace the income lost during a disability. However, there may be additional costs associated with being disabled. According to the National Disability Institute, a family household containing an adult with a disability that limits their ability to work requires, on average, 28 percent more income to maintain the same standard of living as a similar household without a member with a disability. The living benefits of whole life insurance can help with those additional expenses. Living benefit riders on life insurance products have become more common and popular in recent years. The guarantees of whole life make these riders a reliable added benefit for no additional premium in some cases. The chronic illness rider generally allows an insured to accelerate the death benefit on their whole life policy if they are unable to do two of the six activities of daily living (feeding, bathing, transferring, dressing, toileting, and continence), or suffer severe cognitive impairment requiring substantial supervision. The critical illness rider provides an accelerated death benefit payment if certain health issues occur. Qualifying health issues may include certain types of cancer, heart attack, stroke, etc. The funds from these living benefits riders can be used to cover additional healthcare costs that can come with a disability and help to keep a client’s plans on track. But what about the whole life insurance itself? If whole life is used as the foundation of a successful retirement plan, isn’t it important to protect it from the possibility of the insured becoming disabled? Waiver of premium riders ensure that premiums for a whole life policy will continue to be paid if the insured is unable to work due to a disability. If the insured qualifies, the carrier will continue premium payments on the insured’s policy as if they were paying out of their own pocket. That means guaranteed cash values continue to grow and death benefits are maintained.
Adding whole life insurance to your clients’ retirement and legacy plans can help them feel more confident about having a successful retirement while leaving a bigger legacy. The guaranteed cash value growth provides a predictable source of income-tax-free distributions to potentially bridge the gap from an early retirement to full Social Security benefits. Whole life insurance can help to supplement income in retirement with income-tax-free distributions. These distributions can be taken when other volatile assets in a retiree’s portfolio, like stocks, have suffered a substantial downturn. This strategy can help those important, but volatile, assets recover more quickly and support a higher distribution rate of those assets throughout retirement. Whole life living benefits riders can provide an added source of funds in case of a disability. These funds can help to cover the higher costs of becoming disabled and keep a plan on track. Waiver of premium riders can protect the whole life policy itself by ensuring the premiums are paid if the insured loses their job due to a disability. The powerful guarantees and attributes of whole life insurance make every component of a retirement and legacy plan work better.