Some claim that whole life insurance is only practical for extremely rich people. Unbelievably, one of the major personal financial websites states that whole life insurance "typically only makes sense for individuals with a net worth of at least $11.4 million" (estate tax exemption threshold).
Uhhh…
I'm not sure how they came to this conclusion, but it's typical to read terrible disinformation regarding whole life insurance.
This quotation serves as an illustration of the kind of authoritative whole life insurance information that may be found online. By the way, the article from which it was taken promises to cover the same subject as this one.
However, if you read their essay next to this one, you could think we aren't even discussing the same topic.
Exactly why would someone want to use whole life insurance for retirement?
You are one of those inquisitive persons who we warmly welcome to this page if you are asking this inquiry. We both frequently hold opposing perspectives, which is one of the main reasons we've continued to produce content here for more than eight years (yes, you read it correctly).
We don't just argue for the sake of arguing. Actually, not at all.
However, because we were trained by significant mutual businesses with a focus on selling participation whole life insurance, we have a particular viewpoint to share with you. We both hold securities sales licenses (for stocks, bonds, mutual funds, etc.), have some background in the wholesale distribution side of the financial services sector, and one of us once owned an independent research organization (RIA).
After completing all of those tasks and going through the tedious process of retirement and financial planning, we came to the semi-educated conclusion that whole life insurance can be utilized for purposes other than paying estate taxes. Additionally, it has use for those who aren't "ultra-wealthy." In actuality, the majority of those we assist are far from extremely affluent. The majority have far more financial discipline than the average person and make above-average salaries.
We have identified three specific ways that whole life insurance can be used in retirement based on our expertise. Whole life in retirement has more applications besides these.
But these are the three that can directly affect retirement income, and we've discovered that our clients and potential clients like to talk about them the most.
The following three strategies for using whole life insurance for retirement will be examined:
- As a substitute for packing qualified plans.
- Rotation of the income sources.
- To create an everlasting income stream (with guarantees).
Let's first examine how the whole life insurance policy would ever have enough money to support you in retirement.
What Kind of Retirement Benefits Would Whole Life Insurance Provide For You?
The premiums you pay for whole life insurance build up cash value over time. Only a percentage of the premiums you pay are applied directly to the cash value.
You are always free to withdraw money from the cash value of your whole life insurance policy. You can access the cash value in his or her life insurance policy even if you are still alive. However, in this instance, we're focusing on how it might help you in retirement.
There are two ways to withdraw cash values from a life insurance policy.
1. Take money out of the policy.
2. borrow against the insurance coverage
When you withdraw money from a whole life insurance policy, you are actually taking the money out of the policy. Every whole life insurance policy I've ever seen offers the possibility of withdrawals. Having said that, since withdrawals are irrevocable, you should research them first and make sure you are aware of the consequences.
Why would that be relevant? In general, when you withdraw money from your insurance policy, you are giving up paid-up additions. Therefore, dividends will no longer be paid on those paid-up additions. It's not necessarily a terrible thing, but you should be aware of it and comprehend how it will affect your policy going forward.
A loan does not imply that you have taken money out of the policy. The insurance provider lends you money instead. Then you offer your life insurance policy's cash value as loan collateral.
Depending on the conditions, you may choose a particular manner to access the money in a policy. These circumstances include the policyholder's private affairs and the particular life insurance arrangement.
To get a general sense of how whole life insurance might work for you, use our calculator.
Alternative Qualified Plan That Protects You From The Taxman
Take full advantage of your 401(k), IRA, or whatever kind of eligible plan you are able to fund, according to advice you'll find on personal financial websites, periodicals, and books, it seems. Each has slightly different rules, but they all receive the same tax treatment.
Defer current income, pay no income tax on the amount that is delayed, let your money grow tax-free, and when you reach the age of 60, withdraw funds from your qualifying plan without incurring penalties. Taxes would be due at that moment, of course. Your other income sources will determine the amount you pay.
I won't go overboard and say that when you retire, your effective tax rate will be 62%. Despite the fact that there have been some ludicrous statements made about tax rates.
Here, we adopt a different stance. Not that we enjoy paying taxes, and we don't want to imply that your patriotism depends on it.
Even though we will discuss the tax argument in more detail below, we are putting forth the idea today that there may be additional factors to take into account.
Let me tell you a little tale.
I was in a conference with other financial experts a few years ago. I was mingling with strangers before the main event began when I was out and about.
At that time, I had the pleasure of meeting a man who said he had been reading our blog and listening to our podcast for years. I'm always humbled and always in awe. It's strange to assume that strangers will take the time to hear what you have to say. It is demeaning.
Yet I digress...
We were discussing how difficult it can be to get people to pay attention to the message we're attempting to express at times. He started telling me about his father, to cut a long story short.
A man who, from what I understood, had worked in the life insurance sector for many years and was now semi-retired.
The conviction the younger son had in purchasing life insurance rather than establishing his own qualifying plan is what he was trying to express to me (though he had a 401k available).
[Short sidebar from me here...
I'm not advocating that no one should ever use qualified plans or that all qualified plans are awful. Different people have various causes and situations. The specifics matter.]
A six-figure retirement income was generated by his father just from the cash value of the numerous policies he owned. I'm uncertain about the businesses, goods, etc. It truly doesn't matter.
The young man told me a story, and the point of it was that he had only just examined his father's tax return and confirmed that, "on paper," he had no taxable income from investments, pensions, or other sources. Social Security was his sole source of taxable income for income tax purposes.
Because the remainder of his income comes from life insurance plans that he funded throughout his working years, he paid no taxes at all. His social security benefits are not taxed since income from a life insurance policy (especially if it is completely in the form of policy loans) does not go into calculations of provisional income.
Is this the best course of action for everybody? Most likely not, but it's intriguing to consider those extreme circumstances to see what's feasible.
To diversify your retirement income sources, use whole life insurance.
It's possible that you've read or heard that you should aim to remove no more than 4% of your assets in retirement. This is what is usually meant by the 4% rule.
There is a lot of conventional financial knowledge out there, and one of the more popular ones has to do with the 4% rule. There are others who will say that if you just adhere to the 4% rule, everything will be OK.
In spite of the ups and downs, if you confine withdrawals to no more than 4%, you should be alright. After all, average market index returns have considerably exceeded that.
The concept is that it will protect you from running out of money over time when you withdraw the money you require for daily living from your overall retirement liquidity pool. William Bengen first proposed it in 1994, and three academics at Trinity University later examined it in what has come to be known as the "Trinity Study."
This has prompted many financial experts to suggest a strategy in which people liquidate no more than 4% of their entire assets in any given year to pay for retirement expenses. You can find a ton of fictitious data to back it up online; just do a search and you'll never run out of things to read.
1. That during the initial years of your retirement income period of life, there may be a sizable drop in your investment account(s).
2. That you will blindly adhere to a rule of thumb no matter what, disregarding any outside facts.
Instead of taking income in a variety of ways, why not use whole life insurance as the foundation of your retirement income strategy?
Consider not putting all of your eggs in the "I'm going to remove 4% of my investment account value" basket, just as most people aren't going to put all of their eggs in whole life insurance.
What if you saw your full life insurance policy as an additional asset pool you could draw from to generate income?
And instead of withdrawing 4% annually from your investment accounts regardless of how poorly the market performs, you rotate the money coming from which source is used to cover your living expenses.
Even if what I'm presenting is oversimplified, the concept is sound. The specifics depend on each person's personal circumstances.
Think about it...what if you switched. You fund a whole life insurance policy in addition to your retirement plans, investment accounts, stock purchase plan, and savings accounts.
When you retire, you withdraw your income from investment accounts after the year in which they are up and from your entire life insurance policy after a market drawdown. Of course, you may combine and contrast here; this is just a suggestion.
An illustration of historical market returns commencing in 1973 is shown below.
Keep in mind that life insurance companies usually invest their reserves sensibly. The nature of the life insurance industry and the laws that control how they can invest their reserves account for a portion of that.
Yes, dividend rates have dropped over the past ten years and can do so again. However, I was just looking at the entire payout history of a large mutual firm yesterday, and present dividend rates are not unusual. When they were low in the past, the policies nevertheless prospered.
Your policy dividends profit from the intrinsic profitability of the life insurance industry as well as the insurance company's ability to generate respectable long-term investment returns in their general account. When seen as another asset rather than a "must" expense, whole life insurance is actually non-correlated and helps to construct a more effective portfolio balance.
Although I would want to give a more recent image, this one is still useful. Examine the contribution of whole life insurance to total portfolio effectiveness:
Purchase a dependable income annuity.
It's an old idea that no one really discusses anymore: using your complete life insurance policy to buy an income annuity. Since income annuities are not glamorous and offer modest returns in the ultra-low interest rate climate we currently find ourselves in, no one really talks about them at all.
Really, that is a shame. One of the very few ways to unquestionably ensure a stream of income that will continue until death is through income annuities.
I calculated a quote based on a 65-year-old male moving $300,000 from his whole life insurance policy to a single premium instant annuity through a 1035 exchange.
Based on a single-life payout with an installment refund (his beneficiary will continue to receive annuity payments until the entire amount has returned if he hasn't received his entire principal when he passes away).
This is what happened:
Now, a lot of individuals will see that and believe they can perform better than that. They don't want to cede control of their finances in return for a steady supply of income.
Others may argue that the monthly annuity income is insufficient and that they require more money. We understand, but perhaps you could broaden your view a little and acknowledge that these figures are accurate. Increase the overall size of your asset pool that generates revenue if you require additional money.
There are more reasons than the three I've identified and discussed here why whole life insurance is beneficial in retirement. Reach out to me so we can discuss it and see how it might work for you.
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please be nice