By David I. Katz, AAMS®, COO, CFO Financial Planner
Recently I was asked, to weigh in on life insurance policies in general and more specifically, their place in the retirement planning process. While at first the topic might not seem directly on point for a retirement planning, many life insurance policies are sold under the guise of saving for retirement.
Should life insurance be a key part of your retirement plan? Life insurance should be a vital part of your overall financial plan, specifically, if people depend on your income (e.g. your children and your spouse). A sizable income tax free life insurance death benefit payment is the best way to maximize the chance that your dependent's standard of living is not dramatically reduced due to your untimely demise. In fact, income replacement is the number one factor couples site as a reason for purchasing life insurance.
Then the question becomes, what type of insurance should you purchase and is it a good idea to use insurance as an investment for retirement. If you listen to Suze Orman, Rick Edelman or other self proclaimed financial gurus the answer you will get is that there is no reason to buy anything other than term insurance and that permanent insurance helps no one except the agent/advisor that sold the policy. Others will argue that term insurance is a temporary fix and since in generally offers no equity it is like renting an apartment versus buying a home and that you are throwing you money away. Insurance industry legend Bob Castigione, creator of the LEAP selling system, will posit that every investment dollar that you have should be invested in permanent whole life insurance. The truth actually is somewhere in between.
When you purchase life insurance to protect your family, you'll want to be sure you buy adequatecoverage. First and foremost, you want to make sure that if you die there is adequate funds available to take care of your family financially. For many people, that means purchasing Term Insurance which is the most affordable type of life insurance. Others may still consider permanent insurance (Whole Life, Universal and Variable Universal) because they are drawn to the cash value (equity) that the policy builds over time. The problem is that purchasing the cash value insurance, however well intentioned may leave the family at risk. Let’s take an example of a male age 35 that is in good health and purchases a $1,000,000 whole life insurance policy from a (A+) rated insurance company. His premium as a select preferred rating will be approximately $10,960 per year. The policy will build cash value on a guaranteed basis and may build additional cash value based on what the policy owner chooses to do with any non-guaranteed dividends the company may pay each year. Over time, the policy will build cash value in excess of the actual premiums that were paid. But what if he dies? As Shakespeare so aptly put it, “there’s the rub”. The family will still receive only the death benefit portion (which may increase over time if dividends are paid and used to purchase additional insurance) and not the cash value/savings portion. READ MORE