The age-old debate about which is better, term or whole life insurance, deserves to be retired. As financial advisors, our job is to upend myths that can prevent families from reaching true financial security. As I have said before, financial products are amoral, neither good nor bad. Their effectiveness is determined by how we use them solve problems and create opportunities.
I encourage you to consider the following scenarios in which life insurance can create compelling opportunities:
1. Annuity legacy maximization. As retirees age, circumstances can change. A growing number of retirees own annuities they will not need for retirement income. When asked how they intend to use that money, they typically say something along the lines of “We’ll probably just leave it to the kids.”
But what if the value of the annuity could be used to create a significantly larger bequest to the kids and grandkids? Or maybe a church or charity? If the owner of the annuity qualifies for life insurance, consider “turning on” the annuity’s income feature and using it to pay the premiums on a life insurance policy. Yes, the new income from the annuity will be taxable for the owner, but the significantly greater death benefit from the life insurance would likely be tax-free for beneficiaries.
By using this strategy properly (and consulting a tax pro before proceeding), a substantial amount of tax-advantaged wealth can be created using an under-utilized annuity in conjunction with a properly-designed life insurance policy.
2. Family legacy planning. What about the retiree who is in good health and has concern for the next generation or two? More and more retirees are waking up to the reality that their kids and grandkids must plan for retirement without the security of a company pension or the rock-solid promise of Social Security. What can be done to help?
What if a retiree offered her grandkids the opportunity to pay for life insurance on her life? By diverting some of their 401(k) or IRA contributions to a policy, the grandkids can benefit from the leverage and tax-free nature of the policy to fund part of their retirement with minimal risk. It’s basically a way to enhance the inheritance they would have received anyway.
This strategy may not be for everybody and would require a family discussion initiated by the grandparents, but the benefits allow for a substantial family legacy. It’s another surprising way to benefit from the unique attributes of life insurance.
Like any number of financial products, life insurance has the potential to achieve a myriad of financial objectives. The unique attributes of life insurance—leverage, tax efficiency and flexibility—allow for solutions that may not be readily apparent. So stay open-minded, and help your clients take advantage of the benefits of life insurance.
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Adam Cufr, RICP®, is a founding principal of Fourth Dimension Financial Group, LLC. He is an advisor, a sought-after financial commentator, and the author of “Off the Record – Secrets to Building a Successful Retirement and a Lasting Legacy.” To learn more, go to www.OfftheRecordRetirement.com.