While its main purpose is to provide a death benefit to loved ones, a permanent life insurance policy with a cash value component can help your clients supplement their future retirement income sources they may already have in place, such as 401(k)s, individual retirement accounts (IRAs), Roth IRAs, annuities, pensions and Social Security. Here’s how that might work.
Before retirement: Should client(s) die before retirement, the death benefit can provide cash for both the immediate needs of their loved ones and compensate for the loss of planned contributions to their retirement fund.
After retirement: If needed, client(s) can access the policy’s cash value using potential tax-free loans and withdrawals to supplement other sources of retirement income.
CASE STUDY: Jim, 45-year-old healthy male
IUL (Indexed Universal Life) Policy Supplemental Retirement Income Example
Jim has a potential future retirement income shortfall of $35,000 (or $51,471 pre-tax) assuming a 32% federal income tax rate. Provided he makes regularly scheduled premium payments into his IUL, he may access the policy’s cash value using tax-free loans and withdrawals.
Here’s a chart showing the hypothetical potential value of the policy based on various crediting rates:
Supplemental income available to Jim: A potential $52,560 for 20 years, from age 65 to 85
- For an additional source of income later, Jim makes regularly scheduled premium payments of $18,000 for 20 years (to age 65) into an IUL policy with an initial death benefit of $600,000 to meet his protection needs. Beginning in year 21 (age 65), Jim is able to access the policy cash value using loans and withdrawals.
- Assuming an initial crediting rate of 5.97%, Jim can potentially receive an additional $52,560 in net after-tax supplemental income (or $77,294 pre-tax).
- Jim understands that taking a loan or withdrawal from his policy will reduce the policy cash value and death benefit paid to his beneficiaries. Annual premium of $18,000 pays death benefit net of loans and withdrawals.
- Understanding that Jim’s other retirement assets are projected to earn a 5% annual growth rate, it is important to demonstrate your recommended IUL at various crediting rates. While confident his retirement assets could average returns greater than 5% over the next 20 years, with this example, a hypothetical 5% crediting rate generates policy value distributions of $43,692 ($64,253 pre-tax), providing supplemental funds greater than his net after-tax retirement shortfall.
- Jim’s beneficiaries will in most cases receive a federal income-tax-free death benefit net of any policy loans and withdrawals.
This sample life case study is from an actual illustration at today’s rates. This strategy may work for some clients, but it may or may not be applicable to your client’s situation. Premium rates and estimated crediting rates vary from policy to policy, and may be different based on unique individual circumstances, age, and health status.
Custom Case Studies
If you would like a custom case study created for your client, please email us at CaseDesign@thequantum.com. We are more than happy to help you!
As a life insurance consultant with more than two decades of experience, Chase works with advisors to build client relationships, develop strategies, and share product knowledge to help deliver a personalized and customizable experience.
