HOW IS THIS POSSIBLE?

Life insurance can be a core strategy for retirement savings…

Did you know if you are legally blind in the USofA you can carry a concealed weapon?  Apparently in 2001, a legally blind man obtained a permit in North Dakota to carry a concealed weapon. He has managed to satisfy the state’s shooting test by hitting a human-sized target 10 times out of 10 from a distance of 21 feet, or 6.4 metres. Even though this man is legally blind, he hits the target every time – once someone points him in the right direction.

Retirement planning can be like this if you don’t have a plan. Many people can’t see how much income or savings they’ll need to make ends meet in retirement, but if someone points them in the right direction, they might just have enough wealth sense to hit the target.

The talk about life insurance as one of those core strategies in retirement is something that has been met with a lot of resistance in the past. I truly believe this is more of not understanding the process than not believing this additional asset can be of value in the future. 

BEHIND THE SCENES

A little while ago, a client of mine, was concerned about how he was going to generate enough income in retirement. He is 46 years old, and is behind in his target goal in saving for retirement. He’s a business owner and had been putting most of his savings into his business to expand it (which is a common business scenario). He has a small retirement portfolio but because of the way he has invested in his business over the last few years he has not been able to reap the benefits of this current market run for his retirement. He is now in a position where he feels comfortable with where the business is and wants to focus on his future retirement needs. He has decided it is time to put a plan in motion that will help him meet his retirement goals.

…So, as we started to create a succession/retirement plan we discovered there was a need for insurance. While we talked about adding insurance to his portfolio, we also discussed the advantage of the investment vehicle within the insurance policy that would help him create some of the cash flow he and his wife will need in the future – a figure which they believe to be about $100,000 annually after taxes. By implementing an insurance policy as one of the core funding strategy some of the needed funds each year could be provided for them as part of their retirement plan on a tax-free basis. Because he is behind in his retirement planning portfolio, we wanted to create an accelerated plan for retirement that is a reasonably safe platform and not subject to market volatility.  As an added bonus this plan also covers off an insurance shortfall which was discovered in our initial review, should he pre decease his wife.

THE UNDERSTANDING

How does this actually work? 

We talked about the life insurance product and it’s features and set out some projections. Since it was determined there was an insurance need and at the age of 46, he purchased a whole life insurance policy with an initial face amount of $2,000,000. The premiums will be paid on a monthly basis and he wanted the policy to be fully paid up in 10 years. 

Each dollar of premium that he pays is used in two ways: Covering the Cost of insurance itself and making a deposit into a dividend fund inside the policy. That accumulating fund is known as the “cash value” of policy.

Starting at 65, he is going to receive $50,000 annually from this policy. 

How? 

He’s going to borrow $4167 from his policy each month tax-free ($50,000 annually) to use in retirement, by using the policy as collateral (which many banks are glad to do; they’ll typically lend up to 90 per cent of the cash value). This is not considered taxable income because loan proceeds are considered tax-free. There will be an annual interest charge on the borrowing of the money, which he plans to capitalize and will be paid out in full upon death (meaning – he won’t pay the interest annually, but the interest will be added to the loan balance from his policy over the years).

If he passes away at age 90 LE (life expectancy), the total insurance benefit to be paid out is projected to be $3,801,847. This money will be used to pay off the capitalized loan to the bank via his policy which is projected to be $2,032,295 at age 90. There will still be about $575,998 left over in his estate for his heirs and he and his wife would have received $1,250,000 tax-free during his retirement.

He plans to meet the balance of his cash needs in retirement using other strategies that were presented. You don’t have to structure your insurance plan exactly like he has. You could borrow less, or not borrow at all. You could reduce your premiums by stretching them out over a period longer than 10 years, or borrow money to pay your premiums (which is another strategy for another discussion). You can choose to cover whatever portion of your cash needs in retirement that suits you. 

The end result of this is the client now has a plan in place that will help him achieve his retirement goal.

As always speak to an adviser about your various options and create a plan that works to suit your needs.