Protection Products

Optimizing Retirement Income


Protection

When we think of financial retirement strategies, our first thoughts are usually strategies involving Individual Retirement Accounts (IRAs) or annuities. And that makes sense. They are an important part of a secure retirement and they fill a vital need. Today, however, I’d like to throw out another idea— that of using life insurance to optimize retirement income.

Before I dive into the how, I want to start by looking at the financial lifecycle, which begins with your first job. The financial lifecycle has two components: human capital, or the ability to earn an income, and financial capital, or monetary wealth, built up over time. Human capital can be converted into financial capital as workers earn wages and save some of those earnings. For example, this occurs when deductions are withdrawn from workers’ paychecks and deposited into their 401(k) accounts.

Both human capital and financial capital are used over a couple’s lifetime to generate income. During their early working years, couples tend to have higher amounts of human capital and lower amounts of financial capital. As the working years wind down, human capital diminishes. Ideally, at the point of retirement, enough financial capital is in place to generate income for a couple as long as it is needed.

Let’s look at an example

A couple, both age 30 and both high-income earners. They plan to retire at age 65, giving them 30 years of human capital before we need to have it all converted to financial capital to fund their retirement. They each have a qualified plan balance of $125,000 and nonqualified balance of $25,000. Their annual qualified contributions are $19,000 each; nonqualified contributions are $25,000 each.

During their working years, life and disability income insurance are important in case of an immediate need. It’s also a time to plan for retirement, so we put annuities in place, and have the long-term care conversation to make sure they are prepared for an extended health care need. The qualified and nonqualified funds they are investing in are for retirement, as is a plan for long-term care. That’s when these solutions really come into play.

A continued need

After retirement, though, the need for life insurance doesn’t go away, although it might change a bit. Life insurance can be purchased to help achieve several different goals, including income protection, efficient wealth accumulation and wealth preservation

The key is to use life insurance to help with asset LOCATION. Why?

  • Asset location provides a tax-efficient vehicle for retirement savings
  • Asset location gives planners a vehicle to own tax-inefficient assets
  • Asset location can provide tax-diversification in retirement

All of this sounds great, but how do you do it? The short answer is by understanding Section 7702, which defines life insurance, modified endowment contracts (MECs) and tax-advantaged life insurance. The taxation of non-MEC life insurance is actually more favorable than many of the traditional retirement products.

 

Taxation of Life Insurance vs. Alternatives

 

Traditional IRA

Roth IRA

NQ Investments

Annuity

Life Insurance

Tax-Deductible

Yes

No

No

No

No

Tax-Deferred

No

Yes

No

Yes

Yes

Tax-Free Distributions

No

Yes

No

No

Yes

Tax-Free Legacy

No

Yes

Yes

No

Yes

Unlimited Contributions

No

No

Yes

Yes

Yes*

*Subject to suitability and financial justification limitations

 

Back to our couple of 30-year-olds, and how to apply this concept. Start with a minimum non-MEC death benefit, purchased with their nonqualified cash flow. This is will be funded now, while they are still converting human capital to financial capital. On retirement, the death benefit will be level.

Using their $25,000 annual nonqualified investment, we will cover a portion of their insurance need and utilize Section 7702 to create a favorable tax location all while reducing investment volatility.

In this example, the female earns a $1.3 million death benefit, net of savings, to age 65. Her projected cash value at retirement is $3 million, and her tax-free retirement income projection (age 65-90) is $230,000. The residual death benefit is $500,000.*

Make it work for your clients

We can help achieve similar results with your clients. Identify high earners between the ages of 20-55. Incorporate this concept into their term insurance strategy. It all starts with having the conversation. Then tap into your Ash resources. Our Life Sales team is always happy to help structure a plan that is the right fit for your individual client.

 

 

 

 

 

 

*Using Allianz LifePro+ Advantage, Female PNS Age 30, $25,000 for 35 years. 6.9% assumed rate of return.

protection life insurance retirement retirement income section 7702

Give employees more with retirement alternatives


Protection

Finding and keeping the best employees is critical to success in business. Your business owner and executive clients likely know this already. But do they know you can help them attract and retain top talent? Here’s how:

Nonqualified plans are attractive savings alternatives for highly compensated employees. Essentially, they are an additional way to save for retirement without the restrictions of qualified plan contributions.  

Deferred compensation, supplemental executive retirement plans (SERPs) and phantom stock plans operate similarly. Phantom stock plans are deferred compensation/SERPs where the crediting (growth) rate is tied to the company stock price, not insurance policy subaccounts and/or mutual funds. 

A few reasons your clients should consider a nonqualified plan:

  • Comfort – These plans are an excellent tool to assist in closing the retirement income gap for highly compensated employees; qualified plan limitations create an environment where executives’ retirement assets will likely not be large enough to maintain their same standard of living post-retirement
  • Flexibility – Business owners and employees have more options to choose from because nonqualified plans aren’t subject to the strict standards of qualified plans
  • Recruitment and retention – Talented employees are more likely to join a company which offers additional financially rewarding opportunities, and employees are more loyal to companies who offer nonqualified plans

 

Methods of funding nonqualified plans:

  • Unfunded – Some companies elect to pay the obligations out of future cash flows
  • Taxable investments – Employer invests in mutual funds, securities, money market funds, etc. (companies with low tax rates or those that are tax-exempt may see this option as attractive)
  • Corporate owned life insurance (COLI) – Growth is tax-deferred, and policies can be used as a cost-recovery mechanism
  • Taxable investments and COLI – This technique combines the tax-deferred growth advantages of life insurance along with the flexibility of taxable investments. Typically, the employer will utilize the taxable investment when total contributions exceed the maximum life insurance premium amount. 

Put it in Practice: Talk to your business owner or executive clients about the benefits and options available with nonqualified plans. Call the Ash Brokerage Advanced Markets team for more resources and assistance!

 

 

nonqualified retention benefits Deferred compensation retirement