When purchasing participating whole life insurance, many want to see the premium “disappear” as soon as possible. And if you have a limited source of funding to pay the premiums with, like an inheritance, a bonus, the sale of personal property, a settlement, or lottery winnings, it might make sense to have the premium “disappear” sooner than later. But if you are purchasing your participating whole life insurance policy for the purpose of:
• Managing the high cash value that it will create
• Improving your retirement income
• Lowering your income tax liability
• Keeping more of your Social Security Benefit
• Reducing the amount of interest you pay to others
• Controlling the cost of “lost opportunity” because of your IRAs, 401(k)s, 403(b)s etc.
• Creating a sustainable stream of income in retirement,
• Or avoiding the risk of running out of money before you die
Then paying the premium on your participating whole life insurance policy as long as you can affordably and comfortably do so, not only makes sense, it makes brilliant sense!
Let’s say you are 35 years old and starting to save for your retirement. Most advisors will tell you that 10% of your income should be allocated to savings, which means those savings can be used to purchase participating whole life insurance. But how long and how consistently you make those premiums payments will determine:
1. How much “opportunity costs” you will be able to avoid between now and your retirement,
2. What kind of income you will be able to sustain in your retirement without running out of money,
3. And how much of your Social Security Benefit check you will be able to keep and not pay taxes on.
These are important things to consider. Yet, most financial planners and retirement advisors don’t explain this process adequately enough. And that is because it is easier to tell someone how to take off and fly an airplane than it is to teach someone how to properly descend and land an airplane.
Think about it. Saving 10% of your income is a relatively simple notion. Even if you aren’t currently saving that much, understanding it is simple. You take your income and move the decimal point one place to the left. So, if you are earning $150,000 a year, ($12,500 a month or $5769.00 every two weeks) all you need to do is move the decimal point one place to the left and you have $15,000 a year, ($1,250 a month or $576.90 every two weeks.) Bingo: you have your saving rate which can automatically be taken right off the top of what you earn.
But now comes the descent and landing. And here’s the problem, nobody can tell you how much you can take out of your savings without the danger of you running out of money before you die. And that is because:
• Nobody knows how long you are going to live.
• Nobody knows what kind of medical or assisted living needs you’ll experience.
• Nobody knows if or how the income tax rates will change…again.
• And nobody knows exactly how any of these things will alter your future financial needs if and when they do occur.
But this one thing we do know: Traditional retirement plans like 401(k)s, IRAs,403(b)s, etc., are subject to Required Minimal Distributions (RMDs) at age 70.5. And if you don’t take out your RMD, the IRS will penalize you by taking 50% of what your RMD was for that year, right out of your account.
Not so with participating whole life insurance. That money can stay in your policy as long as you like or you can take it all out via a policy loan without ever paying a dime of taxes.
Now, what if you took those RMDs, or even more than the minimum, from your 401(k), IRA and/or 403(b) before you turn 70.5 and used them to live on, paying the taxes owed, but had money set aside in your participating whole life insurance as well? Then, when your Social Security Benefits Checks start coming in, you wouldn’t have to pay income tax on your Social Security Benefits, thus saving you a lot of money. In fact, some sources say it could save you as much as 43%, which would make your money last a lot longer.
Of course, if you took your distributions from your 401(k), IRA and/or 403(b) prior to starting your Social Security Benefits, then the government would have to pay you interest on your deferred Social Security Benefit balance when you did start receiving that benefits check. And if you spend down your 401(k), IRA and/or 403(b) so that your distributions don’t increase your combined income, you can avoid paying income tax on this increased Social Security Benefit making your lifetime Social Security Benefits last longer and go further both for you as well as your surviving spouse.
But that’s not all. Because unlike your 401(k), IRA and/or 403(b), the return on your life insurance paid-up insurance continues to grow even while you are leveraging the cash values for retirement living. This, in itself, can double the amount of money you can count on in retirement compared to a similar amount of money saved in a 401(k), IRA and/or 403(b).
Finally, the death benefit in life insurance can be accessed whenever you have a terminal or chronic illness. This acts as a buffer for long-term care and end of life medical expenses that really destroy any money that you have been able to save for your retirement or your spouse’s retirement. And even after you die, the death benefit which is paid on your life can be rolled into a lifetime annuity for your spouse or loved one, providing them a guaranteed income for life.
Long past is the time when buying term and investing the difference is the key to financial sustainability, if ever there was a time when such advice was financially defensible. People who know best are now using life insurance to fund their guaranteed retirement by using permanent life insurance contracts. People like Rex Tillerson our former secretary of state, is guaranteed $34 million for his retirement through his former employer Exxon. Roberts, the CEO at Comcast, has $232 million reserved and guaranteed for his retirement. And many, many, others have become money wise in protecting their retirement savings by using guaranteed participating whole life insurance contracts instead of speculative 401(k), IRA and/or 403(b) accounts that can be devastated so rapidly by government regulations as well as market conditions.
Ensuring that your savings for retirement are guaranteed is a wise thing today and that is why funding participating whole life insurance just makes sense. If you don’t, you can depend on paying more in taxes and risk spending all your money before you die, living at the expense of others, or having your retirement funds destroyed by medical expenses and assisted living costs. And the kicker is, if you start today you can also reduce the cost of interest you pay to others and take opportunity instead of paying the price of lost opportunities that come your way in life, both of which will not only increase your standard of living but your savings capabilities as well.