IPB 026: Life Insurance as a Retirement Tool Part 2

One broken wrench lies on white background

First, if you haven't listened to the previous episode (IPB 025), you really should. That episode will provide a bit of context for today's episode.

I'm sure that most people who frequent this site and listen to our podcast assume that we think life insurance is a virtual financial swiss army knife.

And while it is indeed a wonderful tool. It's not always the right choice for every situation. In fact, if I had to hazard a guess, I'd say that we've probably turned away two dozen people over the last several years because life insurance was not the solution to their problem.

Yes, I know, it seems highly unlikely that two life insurance salesmen would turn away business from people that actually ask us to sell them life insurance. But it does happen.

I've said it before but it bears repeating…life insurance is not the panacea. It doesn't always work out best for people and when that's the case, we tell them so.

When Doesn't It Work

Please don't take this a blanket advice. Unlike so many financial talking heads out there, we don't fancy making proclamations for everyone. Until we know the details of your particular situation, there's no way for us to know precisely if using life insurance as a retirement tool is a viable strategy for you.

But…there are some instances where there is a very high likelihood that life insurance won't work out so well for you.

Here's an incomplete list:

  • You need immediate income–there are people in our industry that are not willing to tell a prospective client that using life insurance may not work. But we have rarely (can't recall even one time) seen an instance where someone wanted to take a lump sum, plow it all into life insurance and then start withdrawing money the next day made sense.
  • You're health is not that great–now there will likely be some debate around this particular issue. There are some other life insurance marketing gurus out there that suggest if you can't obtain coverage or get coverage at standard rates, you should just use one of your children or grandchildren as the insured and dump all your money into their policy.

    Not a great idea, most of the time. If you have adult children that are gainfully employed, it can work (to a degree). But it turns out that while we view the death benefit as a secondary benefit (given our policy design), life insurance companies are very much concerned about the death benefit. As such, they don't understand why you'd need a $4 million death benefit on your 8 year old.

  • Your hobbies–there are times that your avocation takes you out of consideration i.e. base jumping, stunt pilots, racing jet-powered motorcycles etc. While you may be able to obtain coverage, the likelihood is that the extra expense that will be added will cause the policy to perform poorly in terms of the return on cash.
  • Most of your money is in qualified plans (IRA, 401k, 403b etc.)–this one will probably cause a fair degree of squawking but that's okay, we're accustomed to that. Typically the benefit you receive by purchasing life insurance cannot overcome the inertia of the tax bill. Now, there are exceptions to this and they usually revolve around people that have a lower earned income.
  • Maximizing a pension benefit (pension maximization)–turns out that you probably can't have your cake and eat it too. The idea here is that if you have a pension you could choose the “single life” or “life only” payout to get the highest monthly benefit. Then you purchase life insurance on your life to provide your spouse with a death benefit that will be large enough to replace the lost income from the pension after you're gone.

    Sounds great, but we've rarely seen it work. It can, but you need to purchase the life insurance well in advance (while you're still young) of retirement as the cost of the insurance if you wait until normal retirement age tends to make the math less favorable.

Remember, life insurance is not a magic pill. It needs some strategic planning and most importantly…it needs time.

If you’re curious how it might work for you, please use our contact form to get in touch with us.


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