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Retirement Planning With Cash Value Life Insurance Final
 

Retirement Planning With Cash Value Life Insurance Final

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  • This discussion addresses retirement planning and life insurance concepts in general. It is not intended to address your individual circumstances or the laws of your state. All specific legal and tax questions should be referred to your legal and tax advisers.
  • No doubt about it, the times are changing. The fundamental principles of retirement planning are changing. In some cases, the changes are dramatic. Longer life expectancies, inflation, an “at risk” social security system, diminishing employer pension plans and tax law uncertainty will impact nearly all of us as we plan for and transition into retirement. In some cases, the impacts are potentially negative. To better understand the changing retirement planning landscape, let’s briefly examine each of these factors.
  • According to the National Center For Health Statistics, in 2004, the most recent year available, life expectancy has increased by nearly a decade since 1950. That’s why we now say that “sixty is the new fifty.” Longer life expectancy means that most of us will enjoy longer, more active retirement periods. A longer retirement requires more cash. Nobody wants to run out of money during retirement. Longer life expectancy should sound the alarm that we need to do more planning and saving to generate sufficient cash for retirement.
  • Inflation wears down the purchasing power of savings over time. Take a look at this chart. A dollar in 1967 has the purchasing power of 16 cents today. The impact of inflation is magnified as the time period increases. As we already discussed, increased life expectancy is a fact. Therefore, while we continue to save, we need to factor in the impact inflation will have on our savings.
  • (Read all text on slide aloud). This is actual text taken directly from the front page of a 2008 Social Security Statement that all Social Security participants received in 2008. This is a sobering admission made by the U.S. government. The U.S. federal government is finally admitting that changes need to be made to the social Security System in order to deliver on the promises made to us. Will the changes be in the form of higher income tax rates? Decreased benefits at retirement? A “needs based” payout system? Some combination of these alternatives? At this point nothing is certain, but relying primarily on Social Security for retirement income may be risky.
  • The instability does not end with Social Security. You probably have heard horror stories about major corporations with failing pension plans (Enron comes to mind). When pension plans default, some employees may see their retirement savings plans disappear virtually overnight. According to the Pension Benefit Guarantee Corporation (PBGC), the organization that insures pension plans in the private sector, since 2000, there has been a record number of “extraordinarily large claims for failing pensions.” The PBGC insures roughly 2/3 of all private sector defined benefit pension plans, but the insurance only covers a certain percentage of benefits. Most claimants receive less than their promised pension benefit amount when making a claim for failed pensions. And remember, nearly 1/3 of all private sector defined benefit pension plans are uninsured.
  • Increases in failing pensions is not the only disturbing trend. In 2007 alone, nearly 1/3 of all U.S. companies closed, terminated or froze their defined benefit pension plans. Many companies switched to defined contribution plans [such as 401(k) or profit sharing plans] where the risk of investment loss rests with the employee. Defined contribution plans are generally less expensive to fund and administer. This not so subtle change shifts most of the retirement savings burden and risk from employers to employees.
  • Tax law uncertainty continues to be a concern. Take a look at the major federal tax bills enacted since 1986. Eight of the fifteen tax acts have been added since 2001 alone. The lesson we should learn is that putting all of your retirement dollars in one account or behind one savings strategy may prove costly from a tax perspective. It is prudent to attack the tax code from multiple angles. That way, when the federal government makes more changes, you will have the flexibility to take distributions from the most tax-advantaged accounts to maximize your savings.
  • Now that we have a better understanding of the changing retirement savings environment, let’s examine how these changes have impacted the classic retirement savings strategy. For decades many Americans relied on Social Security and company pension plans to provide enough income for a comfortable retirement.
  • The new reality is that you should no longer rely on the government and company pensions to do the bulk of the heavy lifting when it comes to saving for retirement. As we have already seen, these classic retirement “safety nets” are either no longer there or are at risk of being scaled back. To be safe, most of each retirement dollar should be supplied by personal retirement savings with the remainder supplied by Social Security and company-sponsored pension plans. This strategy lets you control your retirement savings and protects your independence.
  • Life insurance may be an excellent source of retirement cash flow. The use of cash value life insurance is a simple and powerful strategy. Money that you contribute to a permanent life insurance policy by way of premiums not only creates an income tax-free death benefit for your heirs, but also generates cash values that grow tax deferred. While the policy is in force, you can take withdrawals and policy loans without government penalties or adverse income tax consequences (under current tax laws). Retirement cash flow from the policy is received by you income tax free as long as the policy stays in force. Additionally, in some states, personally owned life insurance is protected from the claims of creditors (creditor protection laws vary by state).
  • The cash value life insurance strategy has three phases that may benefit you and your heirs: the accumulation phase; the retirement cash flow phase; and the death benefit. Let’s briefly review each phase.
  • Accumulation Phase : During this phase, the policy is applied for and put into force (subject to insurability). Premiums are paid into a permanent life insurance policy to generate cash value. Over time, the policy’s cash value grows tax deferred. Depending on your state’s laws, the cash value may be protected from the claims of creditors.
  • Retirement Cash Flow Phase : At retirement (or earlier, if you prefer), the policy’s cash value can be accessed by way of cash withdrawals and loans. The withdrawals and loans are structured in such a way to remain income tax free. A key planning point is that the policy must remain in force to retain its tax-advantaged status. If the policy is surrendered or allowed to lapse, then all gains in the policy become income taxable. Therefore, it is important to structure the policy so that there is sufficient value within the policy to keep it in force. I can work with you to make sure your policy is structured to avoid tax traps. You can use the cash flow to supplement your retirement, take a cruise or whatever you desire.
  • Death Benefit : At the insured’s death, an income tax-free death benefit is paid to the named beneficiaries. With a trust, the death benefit can also pass estate tax free. Your attorney can help you with a trust if you are interested in this strategy.
  • As we have seen, the three phases of this strategy may provide powerful living benefits and estate planning opportunities for you.
  • Let’s examine a brief case study to better understand how the cash value life insurance strategy works. (Review bullet points).
  • (Review bullet points with client).
  • By using permanent life insurance, Gary and Susan will generate policy cash value. For this example, we will assume that they decide to purchase a life policy on Gary’s life, but they could opt to insure Susan’s life if they prefer (or if Gary is uninsurable). They will pay 20 annual premiums of $20,000. Gary already has $250,000 of life insurance and is primarily interested in generating more retirement money, so the permanent policy will be designed to maximize cash while obeying all government rules. Starting at age 65, they will start receiving cash flow for 15 years by way of policy withdrawals and policy loans, while keeping the policy in force.
  • Here is a summary of the three phases for the cash value life insurance plan. (Review three phases with client). Please note, the example shows a death benefit at age 85, but this particular policy was designed to stay in force up to age 121 under the current dividend scale (2008).
  • To summarize: For life insurance premiums totaling $200,000 (paid over 20 years), the policy on Gary’s life has a death benefit of $566,954 at age 65, followed by $29,733 of income tax-free cash flow annually for fifteen years by way of policy withdrawals and policy loans (for a total of $445,995 income tax free cash flow) and a death benefit at age 85 of $63,172. Alternatively, the policy could be designed to pass more death benefit in later years.
  • The illustration shown is a summary of a retirement cash flow illustration prepared for Gary and Susan. This example depicts a Virtus Value II Preferred Loan policy with an annual premium of $10,000 for twenty years and policy loans taken for 15 years starting in year 21. The interest rate credited to the policy shown is 5.3% in years 1-10 and 5.8% in years 11 and later. Adverse income tax consequences may result if the policy is surrendered or allowed to lapse prior to maturity. I would be happy to prepare a personalized illustration to show you how this strategy can work for you.
  • Ohio National offers a Waiver of Premium for Total Disability Rider that can be added to a policy to protect policy cash value. In the event of the primary insured’s disability for six months, premiums will be waived and policy’s cash value will continue to accumulate. With the rider in place, policy cash value will not have to be invaded to pay premiums during periods of disability. The rider is affordable and provides a safety net for your policy’s cash value.

Retirement Planning With Cash Value Life Insurance Final Retirement Planning With Cash Value Life Insurance Final Presentation Transcript

  • Please Be Advised:
    • All specific legal and tax questions should be referred to your legal and tax advisers
  • Times Are Changing
    • Longer life expectancies
    • Inflation erosion
    • Social “insecurity”
    • Employer pension plans at risk
    • Tax law uncertainty
  • Longer Life Expectancy Life expectancy has increased nearly ten years since 1950! Source: National Center For Health Statistics, Department of Health and Human Services (2004). “ Sixty is the New Fifty” Year 1950 1960 1970 1980 1990 2000 2004 Life Expectancy at Birth 68.2 69.7 70.8 73.7 75.4 76.9 77.8
  • Inflation Erosion Over the last 40 years, the annual inflation rate in the U.S. has averaged 4.74%. * Source: United States Bureau of Labor Statistics, Consumer Price Index, (2008). Purchasing Power amounts are rounded to the nearest cent. Year Inflation Rate Purchasing Power of One Dollar* 1967 (Base Year) - $1.00 1972 3.3% 80 cents 1976 6.5% 55 cents 1982 6.7% 37 cents 1987 4.4% 29 cents 1992 2.9% 24 cents 1997 1.5% 21 cents 2002 2.4% 19 cents 2007 4.1% 16 cents
  • Social “Insecurity”
    • “ In 2017 we will begin paying more in benefits than we collect in taxes. Without changes, by 2041 the Social Security Trust Fund will be exhausted and there will be enough money to pay only about 75 cents for each dollar of scheduled benefits. We need to resolve these issues soon to make sure Social Security continues to provide a foundation of protection for future generations”
    Text taken directly from the front page of a 2008 Social Security Statement
  • Employer Pension Plans at Risk
    • Since 2000, the Pension Benefit Guarantee Corporation has received a “record number of extraordinarily large claims” for failing pensions.
      • In 2000, $900 million in claims paid
      • In 2006, $4 billion in claims paid
    Source: Pension Insurance Data Book 2006, Pension Benefit Guarantee Corporation (PBGC). The PBGC insures about 2/3 of the private sector defined benefit pension plans. # of claims increased by over 400%! The number of insured pension plans has decreased by 75% since 1985.
  • The Trend Continues
    • Nearly one third of all U.S. companies closed, froze or terminated their defined benefit pension plans by the end of 2007.
    Source: Estimate contained in the Pension Insurance Data Book 2006, Pension Benefit Guarantee Corporation. The PBGC insures about 2/3 of the private sector defined benefit pension plans.
  • Tax Law Uncertainty
    • Tax Reform Act of 1986
    • Omnibus Budget Reconciliation Act of 1987
    • Omnibus Budget Reconciliation Act of 1989
    • Omnibus Budget Reconciliation Act of 1990
    • Omnibus Budget Reconciliation Act of 1993
    • Small Business Job Protection Act of 1996
    • Tax Relief Act of 1997
    • Economic Growth and Tax Relief Reconciliation Act of 2001
    • Job Creation and Worker Assistance Act of 2002
    • Jobs and Growth Tax Relief Reconciliation Act of 2003
    • American Jobs Creation Act of 2004
    • Tax Increase Prevention and Reconciliation Act of 2005
    • Pension Protection Act of 2006
    • Tax Relief and Health Care Act of 2006
    • Tax Increase Prevention Act of 2007
    This is just a partial listing of the major federal tax legislation since 1986!
  • The Good Old Days
    • For many individuals, Social Security and company provided pension plans supplied enough income for a comfortable retirement.
  • The New Reality: Pay Yourself First
    • Social security and pensions: will provide a much smaller portion of each retirement dollar
    • Personal savings: will provide a larger portion of each retirement dollar
    Relying primarily on government programs and employer-sponsored pension plans could leave you short of income during your retirement years
  • Supplementing Savings with Cash Value Life Insurance
    • Simple
    • Tax-deferred growth
    • Income tax-free retirement cash flow*
    • Access to cash without government penalties**
    • Protection from creditors (varies by state)
    • Income tax-free death benefit
    *Cash flow is tax free as long as policy withdrawals and loans are properly structured. **Under current tax laws.
  • Three Phases Accumulation Phase Retirement Cash Flow Phase Death Benefit
  • Accumulation Phase Accumulation Phase Retirement Cash Flow Phase Death Benefit
    • Annual life insurance premiums
    • Policy cash value grows income tax deferred
    • Policy cash value creditor protected (varies by state)
  • Retirement Cash Flow Phase Accumulation Phase Retirement Cash Flow Phase Death Benefit
    • Cash value accessed to provide tax-free retirement income
    • Cash value also available for other needs such as education funding or family and charitable gifting programs
  • Death Benefit Phase Accumulation Phase Retirement Cash Flow Phase Death Benefit
    • Income tax-free, lump sum death benefit to heirs
    • Death benefit may be structured to pass estate tax free to heirs
  • Powerful Benefits Accumulation Phase Retirement Cash Flow Phase Death Benefit
    • Income tax-free, lump sum death benefit to heirs
    • Death benefit may be structured to pass estate tax free to heirs
    • Cash value is accessed to provide tax-free retirement cash flow
    • Cash value is also available for other needs such as education funding or family and charitable gifting programs
    • Annual life insurance premiums
    • Policy cash value grows income tax deferred
    • Policy cash value is creditor protected (varies by state)
  • Case Study: Gary & Susan
    • Profile
    • Married, both age 45
    • Have life insurance coverage on Gary ($250,000)
    • Retirement savings consist of a 401(k) ($150,000) and a rollover IRA ($120,000)
  • Gary & Susan’s Goals
    • Want to retire at age 65
    • They need additional retirement cash flow
    • They are interested in tax savings
    • They need additional death benefit protection
  • Solution: Cash Value Life Insurance
    • Permanent life insurance policy on Gary (or Susan)
    • Annual premiums of $10,000 for 20 years
    • Death benefit is minimized to create more cash value
    • Income tax-free retirement cash flow for 15 years starting at age 65
  • Retirement Supplement Benefits $10,000 annual insurance premium Annual policy cash flow of $29,733 for 15 years Death benefit of $63,172 at age 85 Tax-deferred policy cash value and death benefit for family protection Income tax-free death benefit paid to heirs Tax-free retirement cash flow starting at age 65 Accumulation Retirement Income Death Benefit
  • Summary: Cost & Benefits
    • Cost
    • $10,000 annual premium
      • $200,000 total premiums to age 65
    • Benefits
    • Pre-retirement death benefit
      • $566,954 at age 65
    • Retirement cash flow benefit starting at age 65
      • $29,733 annual tax-free cash flow for 15 years*
      • $445,995 total tax-free cash flow for Gary and Susan
    • Post-retirement death benefit
      • $63,172 at age 85
  • Personalized Illustration Example depicts Virtus Value II – Preferred Loan for a male age 45, preferred nonsmoker, with 20 annual premiums of $10,000 and 15 annual policy loans starting in year 21. Policy carries to maturity (age 121) under current interest and cost of insurance charges. The interest rate depicted is 5.3% in years 1-10 and 5.8% in years 11 and later. The interest rate is subject to change. Income taxes may result if the policy is surrendered or lapses prior to maturity Year Age Annual Premium Total Premiums Annual Retirement Cash Flow Total Income Received Income Tax Death Benefit 1 46 $10,000 $10,000 0 0 $246,673 5 50 $10,000 $50,000 0 0 $290,305 10 55 $10,000 $100,000 0 0 $358,200 20 65 $10,000 $200,000 0 0 $566,954 21 66 0 $200,000 $29,733 $29,733 0 $536,329 25 70 0 $200,000 $29,733 $148,665 0 $404,362 30 75 0 $200,000 $29,733 $297,330 0 $215,873 35 80 0 $200,000 $29,733 $445,995 0 $55,946
  • Protect Your Savings
    • Waiver of Premium for Total Disability Rider protects your cash values in the event of disability
    In the event of the insured’s disability for six months, premiums will be waived and cash values will continue to accumulate.