Life Insurance Protection: The Foundation of a Family’s Future

Life insurance protection is the foundation of a family’s future, providing cash to:

• Replace income for surviving family,
• Pay off family debt, or
• Complete an education fund in the event of the premature death of a family’s breadwinner.

While managing current protection needs and expenses, families also are concerned about saving more for retirement — considering how much income current assets will generate and how much of that income will be consumed by taxes and inflation. Consequently, cash value life insurance can be a big plus in retirement.

Life Insurance in Retirement Planning (LIRP) Plus

Life Insurance in Retirement Planning (LIRP) Plus is a supplemental planning approach families can use to be efficient with funding both their current protection needs and potentially saving more for retirement in the process. LIRP Plus demonstrates how the efficiency of a cash value life insurance policy that provides valuable tax-free death benefit protection for a growing family during an insured’s working years can also be designed so that the potential cash values in the policy generate tax-favored income at retirement to help fund a retirement income shortfall.

The first and foremost feature of a permanent (or cash value) life insurance policy is the death benefit it provides. The death benefit brings “self-completion” to financial goals in the form of cash to compensate for loss of continued contributions and earnings, so it is crucial to decide the appropriate levels of death benefit protection a family needs and can fund.

Fortunately, a permanent life insurance policy can also build a cash value account over time, based on premiums paid into the policy. Once life insurance that matches a family’s death benefit need has been secured, that same policy can serve as a potential source of supplemental income should the insured experience an income shortfall at retirement and may no longer need as much death benefit protection.

A cash value life insurance policy can also provide additional benefits based on features that are added to the policy when it is first purchased. For example, a valuable disability rider may be included in the life insurance policy to pay premiums during a period of extended disability. And for help with long-term care expenses, a rider may be added to a life insurance contract when purchased to accelerate the death benefit during lifetime. There are additional costs associated with such riders and benefits are subject to restrictions and limitations. When the policy death benefit is accelerated for long-term care expenses, it will be reduced dollar for dollar, and the cash value is reduced proportionately.

Sales Strategy: Life Insurance in Retirement Planning Plus

Case Study

Lily Rowan, age 40, is a Director of Graphic Design at a major marketing agency. She and her husband have two children, and Lily has just returned to the workforce after the birth of her second child. Lily and her husband are in the process of planning for their protection and retirement needs now that they have a growing family. At the moment, they are looking at Lily’s needs. She expects her salary and her lifestyle costs to increase an average of 2% annually.

Lily’s current life insurance need, based on daycare costs, mortgage, and college funding objectives, is approximately $1,500,000. Lily is making contributions to her 401(k) retirement plan sponsored by her employer. Her current 401(k) balance is $200,000 and between her contributions and her employer match, she is contributing $22,000 annually.

She also wants to save more, so she has been contributing $5,500 annually to her personal savings accounts, including mutual fund accounts. Her current total savings balance is $40,000. She also assumes that she will benefit from Social Security retirement income, which she estimates will be $24,000 annually. She wants to retire at age 65 and hopes to have roughly $100,000 in net annual retirement income adjusted by 2% for inflation.

Based on her life insurance needs, and after compiling Lily’s financial information and planning objectives, Lily’s insurance advisor illustrates for Lily her potential retirement income shortfall. Her advisor discusses the various options she has to save more and explains that by being efficient with her life insurance coverage, she may be able to provide life insurance protection while saving more for retirement.

Her advisor discusses the different types of cash value policies available and helps Lily to assess her risk tolerance, especially if she decides to purchase a variable universal life insurance policy.

Lily learns that variable universal life insurance is cash value life insurance and that by purchasing a variable policy, she would be investing her premium payments in underlying investment accounts. Lily can choose from a list of available funds the policy offers based on her investment objectives and level of tolerance for risk. Lily learns that there are risks associated with investing in these accounts as outlined in the policy prospectus her advisor provided her.

Lily considers that much like her mutual fund accounts, depending on the performance of the investment accounts underlying her life insurance policy, the cash values available for loans and withdrawals at retirement may be worth more or less than what premiums she paid into the policy. She also learns that additional premiums may be required to keep the policy in force at any given period of time depending on the underlying performance of the funds. She likes the idea of being able to take withdrawals from the policy up to her total premiums paid on a tax-free basis and understands that if she takes further distributions from the policy in the form of loans, the distributions will be tax-free but her death benefit will be decreased by the loan value.

Given Lily’s age and her penchant for mutual fund investing, Lily’s insurance advisor illustrates a Asofsp Accumulation VUL policy growing at an assumed 6.64% net rate after taxes and fund expenses. Assuming the policy earns this rate annually, the premium on a $1,436,988 death benefit is $22,681 for 25 years or to her retirement age of 65. The policy is designed so that the death benefit increases every year in keeping with any increases in cash values until her age of 65. Then at age 66, Lily can begin to take tax-free withdrawals and loans of $61,667, indexed by 2% inflation annually until age 100.