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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Welcome to how to retire on time, the show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire On Time, which you can grab today on Amazon or by going to www.howtoretireontime.com. My name is Mike Decker. I'm the author of the book, How to Retire On Time, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to finance, your money, all of the above, we can pretty much talk about it all. Now that said, please remember this is just a show everything you hear should be considered informational, as in not financial advice.
Mike:If you want financial advice, you can request your wealth analysis from my team by going to www.yourwealthanalysis.com. With me in the studio today is David Franson. David, thanks for being here.
David:Yep. Glad to be here.
Mike:David's gonna read your questions, and I'm gonna do my best to answer them. You can text your questions in to (913) 363-1234, or you can email us at heyMike@howtoretireontime.com. Let's begin.
David:Hey, Mike. Should life insurance be part of a retirement plan?
Mike:The question is, in my mind, is like saying, should a hammer be a part of a toolbox? You might need it. You might not need it. So let me kind of open up a little bit on this question, and kind of give you a journey, if you will. Alright.
David:I'll go on that journey with you.
Mike:Yeah. So what's the purpose of life insurance? Or really insurance in any standpoint? It's to transfer a risk to an insurance company. Now, not to transfer all risk to an insurance company.
Mike:Every type of life insurance is really built around a specific type of risk that you're transferring to an insurance company. So let me use long term care as an example. Long term care insurance or asset based long term care insurance really transfers risk of if you're healthy now and your health declines rapidly in the first, let's say, ten years or so, and you need long term care insurance, then it will probably be a good return on your I hate to say the word investment because insurance is not an investment, but you'll have a nice return on the money you put into a policy Yeah. Because you got sick sooner than expected. But if you don't use it after ten, fifteen years, you might actually have more money to work with had you just put it in the market, assuming the market were to increase.
Mike:Now no one knows the future of the market, no one knows the future of your health, but you're buying an insurance policy in case something that probably won't happen, happens. Insurance and the business model is built on people pooling their money together with the idea that most of them won't need the thing that they're all trying to hedge against, that risk. Okay, so life insurance typically is around a death benefit. You're paying for a death benefit. If you're 30 years old, you're married, got a couple of kids, maybe your spouse is staying at home with the kids, and you're working and you've got a mortgage, term life insurance is a very appropriate thing to have.
Mike:Sure. Because if you died and lost the income, there's an economic problem and an economic hardship for the surviving spouse. Even the stay at home spouse, the homemaker, probably should have a life insurance policy on them, a term life insurance policy, because if that spouse were to pass, now the surviving spouse has to figure out how to afford childcare.
David:Right.
Mike:So do you see term life insurance, it's pretty cheap, but do you see how it's hedging against a specific thing?
David:Yes.
Mike:So when you are approaching retirement, let's say you're in your forties or fifty years old, you may want to transition your life insurance premiums from a term life insurance to a more permanent life insurance policy.
David:Okay.
Mike:I'm talking more specifically like indexed universal life insurance. Why is that? If you fund the policy correctly, you can be adding a cash value associated with a death benefit. So basically, you're growing money. The money should pay for the death benefit itself, and continue to grow at a rate that would be competitive or similar to a bond fund.
David:Okay.
Mike:So what I mean is, if you need money, why do you have assets in the market to grow in case you want to spend it later? Yep. Why do you put money in the bond fund? To have less risk, but access to cash. Yes.
Mike:So what if you could fund a cash value that's paying for your term life insurance, but the cash value is also growing at a competitive rate that would be similar to or potentially greater than a bond fund, assuming you structured the policy appropriately, so you're still growing your money for retirement. And according to line seventy seven zero two of the tax code, it grows tax free, you can borrow against it tax free, and use it as a tax free income in retirement for income, for health care expenses, or for a death benefit in case a spouse were to pass sooner than expected.
David:Okay.
Mike:So let's say, for example, you're using let's say you're using life insurance in your forties and fifties, and at 55 you were to pass. The last five years are your highest income earning years. The death benefit would help the surviving spouse bridge the gap to retirement, and then compensate for the loss of Social Security benefits just in case. Let's say you're 60 years old, and you maintained a life insurance policy, and you retired at 60 years old, but you want to take Social Security at 70 years old, the death benefit can bridge the gap again of of in case the spouse that passes were to pass too soon, and you missed out on the benefits of Social Security. So do you see how you're paying for a benefit in case a potential monetary benefit were lost because of a death?
Mike:Right. But you're also simultaneously growing a bond fund alternative that can grow tax free and generate income tax free in retirement. You're limited to how much you can put into your Roth.
David:Yes.
Mike:But you wanna grow your Roth. Your Roth is is like gold in retirement. It's incredible. But this is a Roth alternative that has a death benefit component that can act as a part of your life insurance
David:Okay.
Mike:Or your death benefit or your overall retirement plan. You're paying for it. Yeah. So don't say I've got an insurance guy or gal and say, hey, I wanna talk about life insurance retirement. They're gonna sell you their product.
Mike:Yeah. And each insurance carrier kind of does things a little bit differently. So for different ages or different health situations, you might want to shop this around. That's why you wanna work with an insurance agent that's independent, that has their own internal resource to kind of do the due diligence here.
David:That makes
Mike:To shop things around and let the carriers compete for your business.
David:Yeah. That makes sense. And then so what kind of I'm thinking here, what kind of money can go into these policies? Does it have to be qualified, non qualified?
Mike:It has to be after tax
David:Okay.
Mike:Money. So can't be in a retirement account.
David:Okay.
Mike:The insurance is always non qualified, not a retirement account. Think of your brokerage account, your checking and savings, money you've already been taxed on,
David:Okay.
Mike:That would be subject to capital gains if you were to invest it in the markets.
David:All right.
Mike:It's just your everyday dollar, the stuff you'd go buy lunch with. That money is, those premiums will be going into a life insurance policy. So you know, you've got term life insurance, which gets more expensive the older you get, You can transition into permanent life insurance, whole life, which we didn't really talk about, that could work if you already have it and to incorporate it. But universal life, I found, is a better cash value growth vehicle for money to be spent or to have the death benefit that's there, and then it can kind of pay for the death benefit if you fund it correctly. And then you've got long term care.
Mike:Admittedly, I've never actually sold a long term care policy. Oh, really? Because when you explain the breakeven and the math, people tend to not want it, but they might want it. Yeah. You're just paying for a premium, and as long as you explain it openly, people can make good decisions.
Mike:Sure. But those are kind of the life insurance policies that you would plan around.
David:Did we talk about, like variable, fixed, or indexed products?
Mike:Yeah. Great point. So term life is just term life. It is what it is. But when you get to whole life or universal life, you can get variable whole life, or whole life, or indexed whole life.
Mike:You've got I mean, basically, it's these different ways that you can grow your money. Yeah. So variable means that the cash value that will be associated with it can go up or down. So if it goes down too much, you might be asked to pay premiums to keep the policy alive. There there are risks associated with that.
Mike:You've got more growth potential, but it's basically in the market with a death benefit, and the fees are typically higher with variables. So whether there's more growth potential, there's more fees, there's more risk.
David:Okay.
Mike:Okay. When you're just talking about whole life or universal life, it's typically kind of like a black box. It's growing at a fixed rate, but the fixed rate can fluctuate slightly, kind like a high yield savings account.
David:Okay.
Mike:But it's supposed to be a kind of a steady Eddie predictable boring bit. And then you have indexed where if the markets go up, you've got a little more growth potential than the steady Eddie bit, but less growth potential in the up years than the variable, but you've got no downside risk. Okay. It's that complicated mechanism that allows people to not necessarily get rich, but have that upside potential.
David:Mhmm.
Mike:And so as you shop different products, you got to be careful about the types of products. And the insurance industry has so many very confusing naming terms and conventions, where you just kind of throw your hands up and say, hey, is this good or not?
David:Yeah.
Mike:Spend the time, slow down. Anyone that does a high pressure situation, pump the brakes and find someone else. And don't shop products. You gotta put the plan together first.
David:Uh-huh.
Mike:Even if you're 40 years old, what's your income strategy in retirement? When do you want to retire? What does that look like? You gotta have a general idea of what that plan looks like. Then explore the strategies you want to implement, the risks and how you're gonna accomplish the solution or how to hedge against them, and then you start to make decisions on should you even do life insurance?
Mike:Does it make sense for your plan in your future, or does it not?
David:Sure.
Mike:Some people will call and ask for a product. Hey. Give me your your best rate. Look. I'm not making these products.
Mike:Right. I'm just independent, and I can shop them for you. I can work with anyone. Yeah. I think that's it.
Mike:Anything else?
David:Don't think so. Unless we wanted to talk about how long I I guess it sounds like what you're saying is term is good up to a certain point, and then
Mike:it seems Yeah. Forties forties is when people should be transitioning. You've got more cash flow, more income.
David:Uh-huh.
Mike:Then you transition to permanent life insurance, like index universal life, I find is more beneficial as a broad statement for retirement because of the cash value component and the hedge against inflation, the hedge against flat market cycles, that kind of reservoir qualification there. But that allows people to better prepare for retirement and the tax consequences associated. We didn't talk about the tax planning around life insurance as well. Right. But if you're 65 or older, there's a good chance that it's too late to really dive into these kinds of things.
Mike:It's just the fees could be too high. You need at least ten years to fund a policy like this.
David:So if you had term all the way into your 70 or late sixties
Mike:You're paying up high premium for term at that point, but they they exist. So just be cautious about it. If you have insurance I mean, insurance is complicated. Mhmm. So make sure you're working with someone that is doing their own internal research, and that they weren't just sold a story to then sell you that story.
Mike:That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility.
Mike:This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date. Go to www.yourwealthanalysis.com today to learn more and get started.