When You Need Financial Protection and Retirement Income –
Life Insurance is There.
When it comes to money, most people worry about two main things: providing for their family and having enough money for a comfortable retirement. Life insurance can be the solution to both worries, and by combining term and permanent life insurance, you can stop worrying altogether.
Term and Permanent Life Insurance:
There are two kinds of life insurance: term and permanent. Term insurance covers you for as long as you own and pay for it (for example, 20 years). At the end of the term, you stop making payments and the coverage stops. It’s the least expensive kind of life insurance you can buy. Most people buy term insurance when they are young and have a family to support because it will provide for their family if something were to happen to them.
Permanent life insurance lasts for your whole life, so it’s more expensive. But it also builds cash value which can be used for income in retirement.
For the goal of saving for retirement with life insurance, we are going to look at an Indexed Universal Life (IUL) insurance policy (a type of permanent life insurance).
Here’s How the Permanent Life Insurance – IUL – Works
An IUL policy is permanent, so you will have insurance coverage for your whole life.
The premiums will be the same amount each month. However, when you are younger, it is less expensive to insure you because you are less likely to die. So, part of the money you pay in premiums when you are young goes to insure you. Part of the money is invested in an indexed account, which is an account that is designed to behave like one of the stock market indexes – for example, the S&P 500 or the Nasdaq. The money that’s invested can increase or decrease like the market does, but since the money is going to stay there for a long time, it’s likely to increase.
Although no one can predict the future, we can look at what these indexes have returned in the past. The S&P 500 has had an average annual return of 6.68% since the stock market began. This would turn a $10,000 investment into $34,000 in 20 years. Now, returns will vary, and some years the S&P 500 will lose money.
Over time, however, the market has always gone up.
As you get older, more of your premium goes to the cost of your insurance, and less goes to your investment. But since the money that was invested early on is still growing, and the money it has earned is still growing, the cash value in your policy continues to build.
There’s another advantage. Because you are paying life insurance premiums, the money grows in the policy tax-deferred.
When you withdraw money to supplement your retirement, you will not have to pay income taxes on that money as long as you still have the policy.
Meet Fred, Who Wants a Comfortable Retirement
Fred is 40 years old, with two teenage children. He’s been saving for retirement, but he’s been saving for his teens’ college at the same time, so his retirement fund isn’t quite where he wants it to be. But he’s maxed out his 401k at work. He has a Roth IRA, but he and his wife both have good jobs, so their income is too high to contribute more to the Roth.
Fred wants to make sure his family is protected if he dies prematurely, but he doesn’t need a lot of life insurance coverage because the kids will be grown and out of the house within ten years.
Fred buys a $250,000 IUL policy. He pays the premiums faithfully for the next 30 years until he is ready to retire. By now, his IUL policy has a couple of hundred thousand dollars of cash value that he can withdraw to fund his retirement. He can get an annual or monthly payment from his policy for the rest of his life. Plus, he still has a $250,000 death benefit that will be paid to his wife when he dies.
Using Both Types of Policies Together
You can purchase a term life policy and an IUL policy at the same time, protecting your family and saving for your retirement at the same time. This is an ideal solution for younger people who may have a higher insurance need.
Meet Ed, Who Wants Family Protection AND a Comfortable Retirement
Ed is also 40 years old, and his children are young. He’s very concerned about what would happen to his family if he were to die prematurely. He is also concerned about having a comfortable retirement. Ed contributes the maximum to his 401k at work, but his wife does not work outside the home, so she has very little in retirement savings.
Ed figures out, by using an online calculator, that he needs $1 million of life insurance. He could buy a $1 million term life policy, but he also wants his wife to be protected in retirement, no matter how long he lives.
Ed buys an $800,000 20-year term life insurance policy and a $200,000 IUL permanent insurance policy. He pays for both policies for 20 years. By that time, his children are grown and have moved out of the house, and he no longer needs the term policy, so he simply lets it expire.
Like Fred, he continues to pay the premiums on the IUL policy, and its cash value continues to grow. By the time he retires, he has a nice nest egg in addition to his other retirement savings. He can begin to take annual or monthly payments from his IUL policy, giving him a tax-free stream of income in retirement.
The Importance of Starting Early
Anyone who has looked into investing in a 401k or IRA knows the importance of starting early. The money you invest early on has a much longer period of time to grow, so you’ll end up with a much larger nest egg than you would if you had waited to start.
The same is true when you buy IUL permanent life insurance to provide retirement income. The earlier you start, the more of your premium will be invested and have the chance to grow. Your policy will have greater cash value, which will let it generate more income for you in retirement.
Long Term Care
There’s one more advantage to using a life insurance policy as part of your retirement planning.
Most life insurance policies can include a long-term care or critical illness rider, which allows you to use part or all of the death benefit to pay for long-term care in a nursing home.
The cost of a stay in a nursing home is very high and rising every year. Nearly half of all people who are now 65 will need to go to a nursing home at some point. Nursing home care is not covered by health insurance or Medicare.
If you have a life insurance policy that has a long-term care or critical illness rider, and you need to go to a nursing home, you may be able to use the insurance policy to pay for the nursing home.
Meet Ted, Who Needs Long-Term Care
Ted is 75 years old, and his wife has passed away. He has a $200,000 IUL permanent insurance policy with a long-term care rider. He is suffering from Alzheimer’s Disease and can no longer live at home. Ted’s daughter finds a nursing home not far from where she lives, and Ted goes to live there. Rather than pay for the nursing home out of Ted’s savings, he can use the long-term care rider to pay.
Ted stays in the nursing home for a year before he passes away. His insurance policy has paid $100,000 to the nursing home for his care, so there is still $100,000 left in the policy. This amount is paid to his children when he dies.
Life insurance is a critical part of planning for your financial future.
Doing far more than paying your family members when you die, a good life insurance strategy can help you reach your financial goals.
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This information is provided for general consumer educational purposes and is not intended to provide legal, tax or investment advice. Loans borrowed from your life insurance policy will accrue interest. An outstanding loan balance (loan plus interest) will be deducted from the death benefit at the time of claim. Dollar amounts are for illustrative purposes, not actual.
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