Subscribe
Share
Share
Embed
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.
So now, just imagine for a moment, you've covered the death benefit you really needed during the time that you needed, you put money into this thing for a couple of years, and then when you start to retire, the death benefit's so small and you've got a way that it's kind of covering itself, you now have this vehicle that has reasonable growth potential, can't go backwards, and you've kind of offset the fees through just not manipulating, but structuring the policy correctly. Welcome to how to retire on time, a show that answers your retirement questions. We're here to move past that oversimplified advice you've heard hundreds of times. Instead, we do wanna dive into the nitty gritty because, well, it matters. There's no such thing as a perfect investment product or strategy.
Mike:Heck, there's no such thing as a perfect or riskless retirement. That's why these details matter. Text your questions to (913) 363-1234, and we'll feature them on the show. David, what do we got today?
David:Hey, Mike. How do you manipulate life insurance so that the cash value grows better? Yeah. Sounds like a trick question. Who who can manipulate?
David:The life the insurance companies are too smart to manipulate it. Is that fair to say?
Mike:They're not manipulated. I think it's more about understanding how to shop.
David:Okay.
Mike:And here's what I mean. If you want a million dollars in term life insurance, you're gonna pay X. If you want 2,000,000 in life insurance, you're gonna pay around 2 x. Right? It's real simple.
Mike:You are paying a certain premium for the risk the insurance company has inherited or taken on, with the odds being in the insurance company's favor. You with me so far?
David:Mhmm. Yes. Yes.
Mike:Okay. The reason why I think the word manipulated is in here is because according to the IRS code, I think it's 7702, line seventy seven zero two, it talks about how life insurance, if funded correctly, can grow tax free, you can borrow against it without paying taxes, and when the death benefit hits, when you die, then it kind of cleans up all of the policy and then pays the beneficiaries tax free. So a lot of people will use life insurance as a part of their plan, whether it's their financial plan when they're in their thirties, forties, and fifties, or in their retirement, if they've got their, you know, fifties, sixties, seventies, eighties, or so on, to do a lot of cool things. The problem with it though is with life insurance, the higher the death benefit, the more cost of insurance you're gonna pay.
David:Okay. And that's sort of a general rule, that's a standard
Mike:Well, yeah, if you die, they're gonna pay out a high premium. Yeah. So the question is, you have to have what's called a corridor. It's the difference between the cash value and the death benefit.
David:Okay.
Mike:The smaller the corridor, the less risk the insurance company is taking, which means the less premium or cost of insurance you're gonna have. Okay? So life insurance is not an investment. That's the first thing we need to discuss. Okay.
Mike:However, I have seen many people who say, Well, we want a death benefit because this like, let's say they're 50 years old, they want to retire at 60 years old. If one were to pass Mhmm. Then the surviving spouse would be disadvantaged because the person that died, that's ten years of income that they could have lost. Yeah. Or that they would have lost, and they have to kind of make up that gap.
Mike:So in that situation, it's like, okay, well this is why people have term life insurance, but I think people are missing the boat with term life insurance, and here's why.
David:Okay.
Mike:You can use other forms of life insurance that generate a cash value while also covering the death benefit for that season. It's through permanent life insurance, specifically indexed universal life insurance. And this is usually what people talk about when they talk about manipulating life insurance.
David:Okay.
Mike:So let's say you're 50 years old and you're gonna put in X amount of money each year for, let's say, five years. Okay? In the fifth year so you a high corridor, so you have a high death benefit. So you put in $60,000, let's say, in one year in your life insurance policy, and there's a 600,000 death benefit. Okay.
Mike:I'm making up numbers. This is not illustrative at all. I just I wanna show you there's a large gap between how much cash you put in and that there's also a large amount of death benefit. So if you put in 60 ks and there's a huge death benefit now, you're gonna pay premiums for that.
David:Because the corridor is so large. Yeah. Bigger the corridor, the bigger the premium.
Mike:There's a high risk now to the insurance company if you were to pass that a couple of weeks later. Ugh. You know, they're gonna have Right, to pay
David:right.
Mike:And maybe the odds are in the insurance company's favor, but you can still get hit by a bus. Mhmm. That happens, unfortunately. Yeah. So so you have to understand that first part of it, but then as you continue to fund it, so 60 k, 60 k, 60 k in the fifth year, you've got over 300,000 or 300,000, I guess, that situation, is now in there, but your 600 ks death benefit is flat.
Mike:So now the corridor has shrunk significantly, the cost of insurance has shrunk significantly.
David:Okay.
Mike:And then at that point, you could say, we don't really need the death benefit anymore at this point, we're close enough to retirement. You could then try to drop the death benefit, so re illustrate the policy to get then that death benefit to be as close to the 300 ks as possible. Do you see how this works?
David:Okay.
Mike:You're not manipulating it, you just have to follow certain regulatory guidelines so that you don't create a taxable event with your life insurance policy so that there's a smaller fee.
David:Okay.
Mike:If done correctly, usually by year ten, you can have reasonable growth potential with little to no fees. When I say little to no fees, let's be very careful about that. All life insurance has fees. But if you structure it correctly, there are certain policies that might give you like an extra bonus or a kickback a little bit in like the eleventh year, intended to offset fees. So it's like a net, near net zero fee, if you structure the policy right.
Mike:There's a lot of nuance in here. I'm not quoting any products, any companies, I'm just saying how it generally works. Okay?
David:Okay.
Mike:So now, just imagine for a moment, you've covered the death benefit you really needed during the time that you needed, you put money into this thing for a couple of years, and then when you start to retire, the death benefit's so small and you've got a way that it's kind of covering itself, you now have this vehicle that has reasonable growth potential, can't go backwards, and you've kind of offset the fees through just not manipulating, but structuring the policy correctly. Yeah. That's how it should be done. It's often not. I'll tell you a little secret about life insurance.
Mike:The bigger the death benefit, the bigger the commission.
David:I was just gonna say, how would the average person know everything you've just said There's no way. To manipulate or massage or
Mike:I used to train insurance agents and financial advisors how to structure life insurance correctly because they'd say, Well, how are you doing? I'd show them. They'd say, what? And then so I would help them out because I would, you know, do good, right? Help people.
Mike:They're gonna be helping people so we can pay it forward in that sense.
David:And these are the agents that are responsible
Mike:These are the agents. The people that are supposed to, like, they're licensed to know this stuff, yet it's so complicated. I I think insurance products are more complicated than securities Mhmm. As a general rule. Mhmm.
Mike:And the securities license is much more difficult to get than the insurance license. So if you structure correctly, let's set then the right expectations. A life insurance policy, the cash value in the index, universal life category, maybe it has reasonable growth potential that it may be able to keep up or maybe outperform, maybe not. Just depends Mhmm. Of a bond fund.
Mike:I think it's in that category of performance. That it'd be reasonable to be near what the bond funds would do, and a lot people will have, like, let's say, 40% of their assets in bond funds. Well, if you wanted a life insurance component to cover your death benefit for a couple of years to bridge that gap, and then you want something that could grow tax free, that you could borrow against tax free, that had the growth, the net of fee, net of all this nuance, growth potential, let's say in ten to fifteen years, we're looking at the IRR, by the way, the internal rate of return, so a more honest calculation of performance, it might be more of like in the bond fund category. Don't expect it to beat the stock market. Mhmm.
Mike:That's not an appropriate comparison at all. I mean, it'll beat the stock market if the markets crash and you don't lose much money in this, but like, you're not looking forward to that situation, that's a one off. Right? Whenever that happens. So it's understanding the rules, it's understanding how to structure it, and it's understanding how how to to fund it.
Mike:And you gotta work with someone that's not trying to get higher commissions, that wants to structure it correctly. Because again, dropping the death benefit, structuring the payouts in certain ways lowers the commission. So that whole integrity bit actually matters.
David:Mhmm.
Mike:Okay. So these are things to to consider with life insurance. But if you look up my Kipling articles on this, I wrote to one's retirement plan with life insurance and the other's how index universal life insurance really works. You can go to Kipling or Michael Decker, if you just search it in your favorite search engine, you can find these articles. But I talk about then how if, funded correctly, you can utilize life insurance to then absorb a lot of the tax issues you might experience with your RMDs or with your IRA to Roth conversions or with other tax planning features that you might not realize that would otherwise be available.
Mike:So there are additional components. Just again, the quick recap: don't expect it to beat the stock market. That's not appropriate. Life insurance is not an investment. Yes, there's a cash component to it, but you're using it for investment or for insurance purposes.
Mike:And then understand it could be a good feature for, like, a bear market protocol, taking income out when the markets crash. It could be a good feature to help you with your tax planning. It could be a good feature in a lot of different situations, but it needs to be defined as it is, not as people want it to look like. That's all the time we've got for today's show. If you enjoyed the show, consider telling a friend, leaving a rating, and most importantly, that you are subscribed to it so that you don't miss a thing.
Mike:For more resources, including a copy of my book, on demand courses, and so much more, just go to www.retireontime.com. If you want help putting your retirement plan together, go to retireontime.com and click the button that says get started. But seriously, from all of us here at Kedrick Wealth, we wanna thank you for spending your time, your most precious asset with us today. We'll see you in the next episode.