by Eloise Glaspie Life Sales Relationship Manager
During their golden years, retirees face many significant lifestyle changes. Some are positive, like gaining the ability to spend more time on the golf course or at the bridge table, more time playing with the grandchildren or gardening, more time reading or writing their memoirs, and more time taking long drives in the country or trips abroad. In essence, many retirees enjoy more of so many things they have spent their lives working toward and anxiously awaiting. In fact, they seem to have more of everything – except INCOME.
The rules for retirement have changed throughout the past generation. Individuals, during their working years, must now take more personal responsibility for building their retirement finances in a time when life expectancies are increasing and job security is on the decline.
Unless these retirees have planned in advance for a part-time job or built a small business, earned income in retirement is a thing of the past. Income now will come from Social Security, personal savings, 401(k)s or, in rare instances, pensions.
In 2011, only 20% of employees had access to company pensions offering a guaranteed lifetime income. Instead of traditional defined benefit programs, nearly 60% of employees are offered a defined contribution (401(k)) opportunity at their workplace.1 The key words here are "defined contribution," meaning that the employees must make out-of-pocket contributions to this retirement savings vehicle, as opposed to the employer bearing all responsibility for the success of the traditional pension plan. Employees are responsible for making investment choices from the funds offered within the 401(k) account, and many individuals lack the investment acumen to make wise choices. Statistically, only 41% of eligible employees take advantage of the 401(k) opportunity even though some employers offer matching contributions up to a specified percentage.
At a time when individuals are living longer, there is less security in their financial lives than ever before. Pension income, if available, is 100% subject to income taxation. Income from 401(k) or IRA accounts is 100% taxable, as are interest and dividend income. Even Social Security Income may be taxed depending on the client’s other existing income sources and amounts. The unknown number in the retirement equation is the prevailing income tax rate on the date that the worker becomes a retiree.
This is the time of year when Uncle Sam is on everyone’s mind. What a great time to compare saving in a 401(k) with before tax dollars versus after-tax deposits in an indexed universal life policy! A $10,000 contribution to a tax deductible 401(k) account will potentially save your client $2,500 in income tax liability (based on a 25% tax rate) in the year of contribution. If that $10,000 is left to accumulate for 20 years assuming a 5% growth projection, the retiree should have a grand total of $26,532.98. Assuming the same 25% tax rate, the IRS will demand $6,633.25 in taxes from this account. Now, remember the earlier discussion about uncertainty of tax rates in the future. Let’s imagine that the rate will be 35% at the end of the 20th year. Uncle Sam will instead want $9,286.54 from this qualified account.
We could continue to discuss projected tax rates and their potential effect on 401(k) money, but let’s change the focus to retirement income that is not subject to income taxes. Talk about wanting MORE – one of the many benefits of a life insurance contract is the tax-free cash value growth component and subsequent use for tax-free income at a designated time in life (e.g. retirement). Overfunding a life insurance contract for this purpose requires vigilant adherence to IRS regulations outlining the maximum allowable policy premiums with the smallest life insurance death benefit to achieve the highest return on premium payments net of policy costs over a given time period. Although this sounds complicated, carrier software makes it easy to stay within the IRS boundaries and achieve successful cash value growth that may be used tax free to supplement other retirement income. Compared with the above taxable examples and assuming the same 25% tax rate, your client now needs only $19,899.73 to replace the $26,532.98.
Show your clients how they can maximize their retirement income by making 401(k) contributions up to the percentage needed to secure an employer match, if available, and deposit the additional amount into an indexed universal life policy designed to take full advantage of the IRS-authorized tax breaks for life insurance cash accumulation. Literally, help your clients get MORE out of LIFE! If the client does not live long enough to accumulate retirement funds large enough to provide an income through the 401(k), there is no contingent source of income for those left behind. Because the IUL features a death benefit component, this plan is self-completing for the heirs. Now that’s providing MORE!
Keep in mind that, like the 401(k) strategy, overfunding a life insurance policy is a long-term commitment. However, if your clients are willing and able, planning for tax-free income from the life insurance policy can be a decision that turns less into MORE when they need (and deserve!) it most. Call your Life Sales Relationship Manager for assistance in designing these cases and running carrier software for less hassle and more placed policies.
FOR AGENT USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC. 12203 – 2012/2/24
1 Brandon, Emily. The Growing Challenge of Funding Retirement. US News and World Report, February 1, 2012.
Agents may not give tax, legal, accounting or investment advice. Individuals should consult with a professional specializing in these areas regarding the applicability of this information to his/her situation.