Life Insurance: A Powerful Option for Retirement Income

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It is becoming increasingly difficult today to find a reliable and financially viable source of retirement income. Traditional retirement savings plans, such as 401(k)s and IRAs, are exposed to the risks of the stock market. Social Security may not be enough for most people to live on, especially if they claim it early. Additionally, pensions seem to be going the way of the horse and buggy.

Given this reality, clients need to start thinking beyond the traditional sources of retirement income. Fortunately, we do not need to venture too far as our industry provides a solution. One of the most powerful but underused retirement income opportunities available today has long been in the retirement planning tool box: life insurance. Specifically, cash value life insurance policies.

Most people know that when you pay a premium towards a cash value life insurance policy, part of the premium goes towards funding the death benefit and the rest goes into a tax-deferred, interest-bearing account known as the cash value of the policy. So far, this must sound a lot like a traditional savings account such as a 401k, but there are some important advantages that you should share with your clients.

1. No Strict Contribution Limits

In 2015, the maximum allowable contribution for a person age 49 and younger to a 401(k), 403(b) and most 457 plans is $18,000, with an additional $6,000 allowed for those aged 50 or older. The combined allowed contribution to both Traditional and Roth IRA plans is $5,500 for a person age 49 and younger, with an additional $1,000 allowed for those aged 50 or older. These limits do not exist for cash value life insurance plans; however, you’ll need to advise your clients on how to avoid using the policy in a manner that the government may interpret as tax sheltering.

2. Variety of Options

One of the most attractive benefits of using cash value life insurance policies is the variety of options. You can find a policy that conforms to your client’s goals, financial situation, and appetite for risk. Whole life insurance policies provide steady returns for clients who want guaranteed income with no volatility. Indexed universal life offers clients the ability to get returns based on major stock market indices such as the S&P 500. This product will allow your clients the limited upside potential of the market while limiting the downside risk.

3. Greater Access to the Money

When your clients need access to their money, there are a lot less obstacles to overcome in cash value life insurance policies versus a 403(b), for example. Trying to get access to money tied up in a traditional retirement plan can be like pulling teeth. Even if you do get permission for the withdrawals, there is still the possibility you may get hit with substantial penalties and taxes. None of these restrictions apply when you need access to your cash value. Whether it is being used for retirement as intended or for an unanticipated emergency expense, you have access to your money when you need it.

Clients have two options they can utilize for accessing their money in a cash value life insurance policy. The first is through a straight withdrawal and the second is by securing a loan.

Withdrawals from a cash value life insurance company are tax-free up to the amount invested into the policy (i.e. up to basis). If your client contributed $50,000 to a policy over time, they could take out $50,000 without paying taxes or penalties. However, every dollar they withdraw beyond that point is taxed.

Another precaution clients need to be aware of is regarding the funding of the policy. They need to ensure that the premium continues to be paid to prevent the policy from lapsing. Since certain policies allow you to fund the premium with interest earned on the cash value, it is worth double checking to make sure you are in the clear.

Clients also have the ability to use the cash value as collateral and secure a loan from their insurance provider. The amount they receive from a loan is not subject to tax; if they need $20,000, they can get a loan for $20,000. They can pay back the loan when they can, or some policies allow them to simply deduct it from the amount of their death benefit. Of course, they need to make their minimum premium payments in order to ensure their policy does not lapse. Additionally, they need to be careful about compromising their legacy goals by reducing their death benefit to unacceptable levels.

It is clear that a cash value life insurance policy has direct advantages over a more traditional retirement savings plan, but it also has benefits above and beyond those already mentioned. By definition, a policy comes with a guaranteed death benefit. This can help protect a family in the event of an untimely death during a client’s working years or secure a legacy for a client in their retirement years. The tax benefits should not be ignored either. By replacing taxable income such as withdrawals from a 401(k) with a tax free loan they not only avoid a tax expense, they can bump into a lower tax bracket altogether, making the use of other forms of income much cheaper.

Another useful income planning option that life insurance provides is the ability to defer Social Security benefits. The withdrawals from the cash value account can be used to replace Social Security income from age 62-70. By delaying in this way, your clients can maximize their Social Security benefit level. For married couples, this strategy can also maximize the survivor benefit, which will provide added financial security after one spouse passes away. Your clients could end up with tens of thousands in additional benefits.

In the end, traditional retirement planning is only as strong as the three legs it stands on: traditional savings plans, Social Security and pensions. The first is risky, the second may not be enough on its own, and the third is disappearing. We need to broaden our scope if we are going to be able to secure our clients a brighter financial future in their retirement. Cash value life insurance plans are one of the most viable alternative solutions available today. Given their potential for providing powerful benefits over other retirement income options, they deserve a second look.

© 2015 Curtis Cloke. All Rights Reserved.

Curtis Cloke, CLTC, LUTCF, award-winning financial professional, speaker, and author, is an early pioneer and advocate for deferred income annuities (DIA). His contribution toward the discovery, development, and delivery of the power of the DIA has been widely acknowledged and embraced as part of the retirement income puzzle by the financial industry. Curtis is the founder and developer of Thrive Income Distribution System launched in 2009, which helps advisors and clients create more income utilizing less of the client’s portfolio. To learn more, visit or

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