The prevailing thought about life insurance is that we “don’t need it” once we retire and are no longer earning an income.
I’m here to show you how having a life insurance death benefit, even after you retire, can make everything else you have in your financial life work even better.
If you could show up on the day of your retirement with either:
1. $1M in assets
2. $1M in assets + $1M of permanent death benefit
Which of those two scenarios would you prefer?
Most people say they’d prefer the second scenario but don’t believe you can get it without spending more along the way. They don’t believe it because the concept of actuarial leverage is not taught to us by the financial industry and HR departments.
Suspending our disbelief for a moment, assuming this retirement outcome is possible, what would that mean for our life during retirement?
6 ways to use a life insurance death benefit while you’re still alive:
- Use the net present value of the death benefit as a place to store cash.
Since a whole life insurance death benefit is a guaranteed future cash flow, that future cash flow has a net present value. This is called the “cash surrender value” or, simply “cash value” of a whole life insurance policy. Cash value is unique to permanent life insurance, as opposed to term insurance which does not have a cash value (because there is no permanent death benefit).
Cash value acts like a super-charged savings account. It’s guaranteed and, more importantly, it’s liquid. Oh, and it grows tax-deferred and can be accessed tax-free.
This is simply a brute-force analysis of what we could be earning on our cash. What is our cash doing for us, sitting in a bank? Probably earning 0.1%?
A healthy 50-year-old could earn around 4% on their cash in a whole life policy – that’s 40x that of a big bank…
$200,000 in cash over 30 years:
|Whole Life Cash Value:||$648,678|
A $450,000 improvement to our financial lives just by changing were we store our cash…
- Discounted dollars to pay for long-term care.
Because of the costs, illness that requires long-term care are a bigger risk than dying in this stage of life. If long-term care is required, how will this be paid for? Will your retirement accounts be sufficient to take on the burden of these additional costs? If not, whose accounts will have to take over?
The guaranteed death benefit of a whole life insurance policy comes with provisions to access that death benefit while you’re still alive to pay for medically covered costs, including chronic and terminal illnesses.
Does it make more sense to pay for these costs with hard-earned retirement dollars or actuarily-discounted death benefit dollars?
- Market volatility buffer.
Dividend-paying whole life insurance is a true non-market-correlated asset. Unlike bonds, which are also affected by total market-corrections, the cash value of a whole life insurance policy grows actuarially, unaffected by whatever is happening in the market.
Because of this true diversification, whole life insurance cash value can act as what Dr. Wade Pfau calls a retirement “buffer asset.” During negative years in the market, retirement income can be taken from or against the cash value of a life insurance policy. This allows your market accounts to recover from negative years before having to sell shares, thereby protecting against “sequence of returns risk” that can decimate retirement portfolios.
Having even one single year of “buffer” income can mean the difference between passing on millions when we leave this world …or completely running out of money.
- Sell your death benefit!
There is a market for everything. And death benefits are a highly sought-after investment for the same reason as is owning one in the first place: the death benefit is guaranteed.
A “life settlement” is when someone pays an upfront lump sum to transfer the ownership of a whole life insurance policy from the original owner to the investors. When the insured dies, the investors are paid the death benefit.
- Asset replacement.
During our working years, life insurance acts as income protection. It protects our family against the loss of income.
During our retirement years, life insurance (if you still have it) acts as asset protection. It protects our family against the loss of assets that may have to be consumed, to live on, during retirement.
Having a guaranteed, permanent death benefit replaces the value of other assets. Rather try to live on interest-only or a prescribed distribution rate, our asset replacement insurance gives us a “permission slip,” so to speak, to spend down other assets, to use and enjoy while we are still alive, without “disinheriting” any of our heirs to do it.
The full, i.e., non-taxed, value of those assets is replaced by the death benefit and received by the heirs. More actuarial leverage.
- Offset taxes due on highly appreciated assets.
Having the ability to replace the value of assets gives us the ability to employ incredible tax-savings strategies. Donating highly appreciated assets to a charity eliminates the capital gains tax on that asset. The asset is then annuitized and provides guaranteed lifetime income based on the full, non-taxed value of the asset.
The donation creates an additional tax deduction in the neighborhood of 30% of the value of the asset. This deduction can then be used to offset taxes due upon the sale of other assets.
To Sum it All Up:
All the above are ways to actuarily leverage dollars that come into our lives simply by putting those dollars into a whole life insurance policy, first, before performing other economic activities with those dollars. By doing so, we get more use and enjoyment of our money, while we are still alive, than we could have without it.