8 keys to a successful life insurance retirement plan

By Ken Godfrey

Life Insurance Financial Evaluations, LLC


When selling or considering a life insurance policy with the intent to access cash values at some point in the future, it is important for the agent/consumer to understand and pay attention to the following policy details.

As the end of the year approaches, it is now time for employees to make contribution and benefit elections for their company sponsored 401(k) and/or nonqualified deferred compensation plans. As a supplement or alternative for 401(k) and/or NQDC plan contributions, many life insurance agents may recommend consumers purchase a permanent life insurance policy to meet their retirement planning goals because of its tax deferred cash value growth potential and tax preferred access to cash values via policy loans.

When selling or considering a life insurance policy with the intent to access cash values at some point in the future, it is important for the agent/consumer to understand and pay attention to the following policy details:
    1. The policy should be overfunded, meaning the cash values are high in relation to the death benefits. This minimizes the policy expenses and should increase long term policy performance.

    2. The policy should not be classified as a modified endowment contract so the policyowner can access cash values on a tax preferred basis and without excise taxes.

    3. The policy type (e.g., whole life, universal life, equity indexed life, variable life) and corresponding investment allocation should be carefully chosen to meet the policyowner’s risk profile.

    4. The policy should have minimal cash value surrender charges for a limited number of years.

    5. The purchaser should clearly understand the policy loan rate (fixed or variable rate), how often it can be changed and how interest will be credited to values associated with policy loans. When taking policy loans, the relationship between the interest charged on a loan and the interest credited to cash values attributable to the loan is very important to understand to avoid unnecessary risk and policy costs.

    6. Significant policy loans can reduce policy flexibility and may cause the policy to lapse if the outstanding loan balance becomes greater than the cash surrender values. Therefore, the policy should have an overloan protection rider that, when elected, will prevent an unwanted policy lapse and corresponding tax consequences.

    7. Life insurance illustrations are hypothetical in nature to show how the policy may work under a given set of assumptions. Actual results will most likely differ and the policy should be analyzed under a variety of assumptions.

    8. Once the policy is issued, it is important to periodically review and proactively manage the policy to meet the financial planning needs. This may include altering premium payments or death benefit amounts or reallocating policy cash values.
Paying attention to the items above should improve the long-term results and prevent the policy from lapsing if policy performance is less than expected or policy loans and loan interest become substantial over time. To make sure the life insurance policy fulfills the policyowner’s financial planning goals and objectives, both the initial design and ongoing management are very important.

If improperly designed and/or neglected, the policy results may be very disappointing and the policyowner may incur unwanted tax consequences.

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