How to Balance a Retirement Plan in an Unstable Time

By John L. Smallwood, CFP®

The upheaval of 2020 has upended many financial plans, causing people to reassess their retirement strategies.

More uncertainty lies ahead in 2021 with regard to COVID-19 and its effect on the economy. In this unstable setting, keeping a retirement plan balanced is essential, but many people are missing an important piece – a whole life insurance policy

The key to a successful retirement plan is having beautiful balance in it. A whole life insurance policy is the lynchpin in a balanced plan. With 20 to 30 percent of your net worth in life insurance cash values with a death benefit, you will have substantial funds to cover taxes, healthcare costs, and other needs, and leave money for your family.

Unfortunately, what often happens is that when people retire, they lose the policy because the premiums increase. The purpose of a sound financial strategy is to reduce taxes, risk, and fees, increase your retirement income and pass more money on to your family. But losing your life insurance in retirement defeats that whole strategy. With a strategy that has no insurance, you have to spend down your assets.

The benefits of a whole life insurance policy as part of a retirement strategy are as follows:

• Waiver of premium.

  This is one of the main benefits of a whole life policy. If you were to become disabled at some point while the policy is in force, then the policy itself pays the premiums.

• Increasing death benefit.

  This pays your beneficiaries when you pass, and since there is guaranteed cash value on a whole life policy, it has value even if you pass prematurely. When you die, the death benefit is passed to your heirs income tax free, although some state taxes may need to be paid.

• Creditor proofing.

  In many states, the value of the policy is creditor-proof, meaning it is not subject to the claims of creditors.

• Dividends. A whole life policy has dividends, and those dividends have unique tax features. You can take those dividends in cash, or you can reinvest them back into the contract. If you have the dividend paid out to you in cash, you receive that tax-free until you receive your basis in the policy, which is figured as premiums paid multiplied by the number of years you’ve paid premiums. That tax-free dividend does not appear on your tax return, which can be a huge benefit.”

• Guaranteed cash value.

  The beauty of the cash value is that it is available at any time. And it is money you can use strategically, to take advantage of opportunities, or for emergencies.

• Loans.

  When someone borrows from their whole life policy, they’re actually borrowing from the premiums that they’ve paid in. These policy loans can be taken tax-free. However, you must pay back the loan, including interest, and failure to do so may make the loan taxable.

•  Volatility buffer.

  Portfolio withdrawals in a down market put pressure on the portfolio and increase the odds of running out of money. Here’s where the life insurance cash value can help you at a critical time. It offers a volatility buffer. When the market is down, you could pull some income from your policy to use while the stock market portion of your portfolio returns.

The whole life policy is the main tool at the foundation of your financial plan. It allows you to do multiple things in retirement, and potentially can even increase your income.

John L. Smallwood, CFP® is a senior wealth advisor (www.johnlsmallwood.com) and president of Smallwood Wealth Management and affiliated companies, providing investment consulting and financial plan design for corporate executives, entrepreneurs, and professionals. He is the author of It’s Your Wealth – Keep It: The Definitive Guide To Growing, Protecting, Enjoying, And Passing On Your Wealth, and a previous book, Five Ways Your Wealth is Under Attack.