Cash value life insurance remains a popular retirement planning product, especially for individuals in higher tax brackets. How do you evaluate which is the right policy to buy for your specific retirement planning needs?
As an article in Forbes notes, “the funds can be used as a volatility buffer during down markets, plus they can be a source for tax-free retirement income.”
However, people need to find the right policies for their unique retirement plans, which often proves challenging due to the complexities of the products.
The risk element can be considered the price a consumer pays for security for a premature death and a large portion of the premium for a cash value life insurance policy goes to the reserve being garnered in the policy.
“Unlike most forms of insurance, with life insurance the risk of dying is 100%. Everyone dies – it’s just not clear when that will happen, and that’s what the life insurance is for, noted Steve Parrish in Forbes. “With cash value life insurance specifically, the insurer overcharges for coverage in younger years so that the price will be manageable in later years. Otherwise, the premium for a thousand dollars of protection on a 100-year-old would be close to one thousand dollars.”
Those excess dollars from the early years are invested and how they are invested will impact how much the cash value will grow.
For example, whole life insurance has a fixed premium and guarantees a minimum return on investment. The policy holder receives any excess earnings via tax-free dividends. Universal life has flexible premiums and has an interest rate to the cash value. Variable life insurance allows the purchases to control the investing of the cash values but that purchases also gets some risk with that freedom.
There are also regulatory concerns for life insurance policies. Federal oversight is lacking, leaving life insurance to be regulated by individual state law. Oversight issues allow for some companies to make unrealistic claims about the long-term performance of policies. The fact that cash value life insurance is designed to be an investment for decades means that some people will not realize they have been wronged until it is too late.
Cash value life insurance should not be avoided because of these challenges, but rather thoroughly evaluated.
“We don’t avoid investing in stocks simply because their value will fluctuate over the long term; instead, we simply build volatility into the equation. And, to stack the odds in our favor, we do our homework on ways to maximize our return while minimizing our risk,” Parrish wrote.
He shares his strategy for finding the right product to fit your retirement portfolio.
One of the first steps is to figure out your profile. There are myriad options with cash value life insurance: Do you want flexibility? Higher risk for greater return? When would you want/need to access any cash values in the policy?
“If you are risk averse and consequently want the insurance company to credit your cash values based on their consistent, but conservative investment philosophy, a whole life or traditional universal life policy may best fit your profile,” Parrish explained. “If, instead, you want the crediting of your cash values to be more reflective of the stock market, while still maintaining some level of guarantees, an indexed universal life may better suit your needs. Finally, if you want permanent life insurance coverage, but also want to control how your account values are invested, a variable product would be best.”
Long term care, chronic illness and disability can be included in some modern policies.
It is important to involve an advisor. Cash value life insurance demands the ongoing, keen eye of a professional since some tweaks may need to be made for best utilization.
There are a number of hazards and pitfalls of which a sound advisor can help you navigate, including questioning policy illustrations, not borrowing to pay premiums and building your life insurance plan into your retirement plan.
Due diligence is demanded when looking into cash value life insurance, but there are benefits to finding the right policy to meet your needs.
Important information about mutual funds is found in the Fund Facts document. Please read this carefully before investing. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Unit values and investment returns will fluctuate.
Insurance products, including segregated fund policies, are offered through Beyond Business Financial Solutions Inc., and Investment Representative Nathan Garries offers mutual funds and referral arrangements through Quadrus Investment Services Ltd.