Don’t Borrow Your Way To Retirement

By |2018-11-02T13:56:42+00:00October 1st, 2018|Insurance, Retirement Planning|

“Life insurance is the only tool that costs pennies and guarantees dollars,” said the legendary industry salesman Ben Feldman. This powerful leveraging factor along with permanent life insurance’s ability to allow someone to accumulate funds tax-free are two reasons why properly structured insurance can be a powerful financial planning tool.

Cash value inside a permanent life insurance policy builds up income tax-free as long as it is compliant with the provisions of the Internal Revenue Code. According to McGill’s Life Insurance, with a policy loan, “the policy owner makes an advance withdrawal of cash values otherwise available when the policy is surrendered or when the insured dies.” Much like a secured credit card, the cash value determines the borrowing limit. If the amount borrowed gets close to or equals the cash value, the policy may lapse. The accumulated loan can create a tax time bomb where funds inside the policy are no longer accumulated income tax-free. These types of policies can be a powerful cash management tool, particularly for those a few years away from retirement. Still, care must be exercised, so that policy loans do not cause a lapse.

Some marketers promote policy loans as a source of lifetime income. We have seen this primarily from those who promote indexed universal life (IUL) insurance. For tax-free accumulation, there are two primary chassis of permanent life insurance: whole (ordinary) life and universal life. Ordinary life insurance with fixed premiums is the most common type of whole life. From the Leimberg Library’s book on Life Insurance Planning, “universal life is a “flexible premium” “current assumption” “adjustable death benefit” type of cash value life insurance. The term current assumption means that current interest rates, as well as current mortality and expense charges, are used to determine additions to cash values.”

With universal life, there’s an inherently dangerous possibility that flexible premiums won’t cover a rising cost of insurance. One book dismissed the concern that non-guaranteed expenses could increase to their statutory maximum stating: “Many well-regarded IUL companies haven’t had to revert to these expenses in any of their products at any time in the last 100 years” — even though the first IUL appeared twenty-one years ago. Indexed universal life can have its applications, but we heed the warning of a senior vice president of life insurance sales at Allianz Life, when he wrote in a July 2018 article that “IUL [indexed universal life] is not a guaranteed source of retirement income or a guaranteed income stream.”

When we were newer to the industry some time back, we were pitched on IUL for providing tax-free retirement income. An illustration showed hefty amounts being available for policy loans annually in year twenty-five after paying premiums steadily for the first ten years. Funds were projected to continuously grow by +6% year in and year out on a nonguaranteed basis.

Such optimistic illustrations form the basis of what we call “if-come” planning. These hypothetical projections are often based on optimum results in a perfect world where the economy never changes. The better alternative to “if-come” planning is income planning, including using a fixed index annuity with an income rider. These proven, guaranteed financial products allow one to determine a baseline amount of income to be received by a specific date, and project that amount or more over the course of an individual or joint lifetime. The trade-off, of course, for having more certainty is that you won’t get the income tax free accumulation reserved for life insurance.

Life insurance can be used successfully as a tax-advantaged cash management tool or even as a supplement in your financial blueprint. If you are considering using these types of policies, or you have received a proposal or illustration, please contact us, and we will be glad to provide an honest, unbiased review and, if needed, suggest alternative strategies.

 


1. C.W. Copeland, McGill’s Life Insurance (Bryn Mawr: The American College Press, 2017), 9.7.
2. Stephan R. Leimberg, Robert J. Doyle, JR., Keith A. Buck, The Tools & Techniques of Life Insurance Planning (Erlanger, The National Underwriter Company, 2015), 283.
3. David McKnight, Look Before You LIRP (San Bernardino: CreateSpace Independent Publishing Platform, 2016), 71.
4. Jason Wellmann, Unlocking The Benefits of Cash Value In IUL, InsuranceNewsNet, July 26, 2018.

About the Author:

Ashok Ramji
Tired of the ups and the downs of the stock market, Ash has refocused on Safe money retirement strategies, exploring ways to protect retirement assets, increase income, and protect against potential losses from the markets, the economy, health circumstances, taxes, or other uncertainties of life. Web Sites: topplanning.retirevillage.com | topplanning.com