3 Ways to Use Life Insurance in Retirement Plans


September is Life Insurance Awareness Month. Why should this matter to you? Because the percentage of households that own life insurance continues to fall. We have recently changed the face of “financial planning” to only engage with clients through asset management services. Worse yet, our industry refers to that engagement as “wealth management.”


The idea of wealth management should dictate holistic planning, which includes basis risk management, income stability during retirement, legacy goals, tax planning, and health care planning – both medical and long-term care. However, our industry falls short of holistic planning. The first step is to look how our asset managers and retirement advisors can benefit from a healthy and robust annuity partnership. Below are just a few quick ideas to bridge the gap for our clients.


  • We find that many of our clients don’t need to live off their required minimum distributions (RMDs) in retirement. Currently, some clients elect to defer their RMDs using a qualified longevity annuity contract (QLAC). Instead, we need to evaluate whether our clients would rather transfer more wealth via life insurance. By using the RMDs to purchase life insurance, they can pass more qualified funds to the next generation, and the transition happens tax-free instead of at the highest tax bracket. 


  • Our research shows that the use of a non-correlated asset benefits the distribution strategy of most retirees. With any systematic withdrawal strategy, taking the income from a non-correlated asset improves the success ratio of the income over 20 years. Using multiple iterations, we found that a typical withdrawal strategy fails 23 percent of the time. When we introduce a non-correlated asset and take withdrawals from it after every down market year, the client only had failure in 2 percent of the time. Portfolio values ranged from neutral to as high as $600,000 more in assets under management after 20 years. Non-correlated assets can be cash, fixed annuities, and fixed indexed annuities; however, life insurance and Home Equity Conversion Mortgages (HECMs) provide tax-free access to capital with little or no cost and with flexibility to choose when to initiate the income replacement. 


  • The other way to leverage annuities in the planning process is to maximize the long-term care pool of assets and income. There are several ways to accomplish this goal. First, existing annuities may be annuitized for a 10-year period certain (assuming older than age 59 ½) and used to purchase life insurance with new long-term care riders. Second, several carriers have annuity-based long-term care policies. This allows you to take tax deferral that was purchased for emergency purposes and make those gains tax-free for qualified long-term care expenses. 


There are many ways annuity producers, financial planners, wealth managers – whatever retirement income planners want to call themselves – can utilize life insurance to better their clients’ plans. These are just a few. We will explore some other ideas during the month of September for Life Insurance Awareness Month. 


Winning Strategy

For retirement income planners, life insurance should be an integral part of the holistic planning process. Without risk management, income and retirement cash flow can be in jeopardy due to unplanned circumstances. 


About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of retirement at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”

Life Insurance Life Insurance Awareness Month Annuities Retirement