Getting Retirement Ready with Life Insurance

by Mark Peterson

Senior Vice President, Independent Distribution, AIG Financial Distributors

Planning for retirement can be a struggle. When seeking a strategic approach, it may be helpful to think of each dollar that’s being put toward retirement as going through three phases: contribution, accumulation and distribution. To help achieve a financially solid base for retirement, the funds ideally would grow in each phase. That doesn’t always happen, but leveraging life insurance is one way to potentially counter obstacles on the road to retirement.

Bypassing Roadblocks

The difficulty with some traditional retirement vehicles, such as 401(k) accounts and individual retirement accounts (IRAs), is that if maximum marginal tax rates rise, as they have recently, these accounts may become less effective at preserving wealth. The benefits of making deductible contributions and enjoying tax-deferred growth may be outweighed by high marginal tax rates when the need to begin making taxable, mandatory withdrawals (required minimum distributions, or RMDs) kicks in, currently at age 70 ½. (Keep in mind that all tax statements in this blog post are based on current tax law and that a qualified tax expert should be consulted when considering one’s individual circumstances.)

In addition, when IRA or 401(k) plan assets pass through inheritance to the owner’s (non-spouse) beneficiaries, they do so as regular income and often are taxed at high rates, as beneficiaries often are in their peak earning years and are subject to correspondingly peak tax rates.

Watching for Potholes

Some retirement plans address these problems by allowing participants to accumulate and distribute assets without paying taxes, although with a significant drawback: the initial contributions are nondeductible. The Roth IRA is an example of this type of plan. In addition to providing a vehicle for tax-deferred growth and zero taxation on qualified distributions, the Roth IRA requires no mandatory withdrawals by the owner, and the money passes income-tax-free to the beneficiaries after the owner’s death. But again, initial contributions are nondeductible.

The Roth IRA also has other drawbacks which may be significant for some people, particularly high-income earners. Single taxpayers whose modified adjusted gross incomes exceed $132,000 (and married couples who file jointly, with adjusted gross incomes above $194,000) are ineligible to contribute to Roth IRAs.

Even for people with incomes below those thresholds, the Roth IRA, like its traditional IRA cousin, limits maximum annual contributions to $5,500 (or $6,500 for people ages 50 or beyond). Also, people who skip making contributions to a Roth IRA in one or more years are not allowed to “make up” the contributions later; those potential contributions and the benefits that may have accrued to them are lost.

Finding A Way Forward

Despite their drawbacks, a 401(k) account, an IRA or a Roth IRA may be useful in retirement planning. However, their utility may be greatly enhanced when other financial products are utilized to help offset some of the limitations and add diversification to a retirement plan.

Life insurance is a prominent example. The IRS does not impose limits on the amount of life insurance premiums a person can pay or the amount of money someone can earn while still being allowed to fund life insurance premiums. Additionally, with a properly structured life insurance solution, the policy holder has the option to miss a payment, or make only a partial payment, and then contribute the missed amount anytime.

Furthermore, life insurance death benefits generally pass income-tax-free to beneficiaries after the policy holder’s death. And unlike a 401(k), an IRA or a Roth IRA, life insurance is a “self-completing” asset. If the insurance policy terms have been met, beneficiaries may receive the full death benefit even if the policy holder died before the contract was fully funded.

Here’s the bottom line: leveraging multiple types of financial products in a long-term strategy may help achieve retirement readiness. With its tax-advantaged treatment, flexibility and other features, life insurance merits thoughtful consideration when planning for retirement and the leaving of a legacy.

For more information about the role of life insurance in retirement planning, please contact MVP Financial Services, Inc. 

This information is general in nature, may be subject to change, and does not constitute legal, tax or accounting advice from any company, its employees, financial professionals or other representatives. Applicable laws and regulations are complex and subject to change. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. For advice concerning your individual circumstances, consult a professional attorney, tax advisor or accountant.

Policies issued by American General Life Insurance Company (AGL) except in New York, where issued by The United States Life Insurance Company in the City of New York (US Life). Issuing companies AGL and US Life are responsible for financial obligations of insurance products and are members of American International Group, Inc. (AIG). Products may not be available in all states and product features may vary by state. Guarantees are backed by the claims-paying ability of the issuing insurance company.

AIG is the marketing name for the worldwide property-casualty, life and retirement, and general insurance operations of American International Group, Inc. For additional information, please visit our website at www.aig.com. All products and services are written or provided by subsidiaries or affiliates of American International Group, Inc. Products or services may not be available in all countries, and coverage is subject to actual policy language.

Leverage IUL Insurance for Retirement

by Mark Peterson

Senior Vice President, Independent Distribution, AIG Financial Distributors

Permanent life insurance, which offers not only a death benefit, but also the potential for cash value growth in the policy, can play a key role in retirement planning. Sales of index universal life (IUL) insurance, a type of permanent life insurance, have risen recently, perhaps because IUL offers so many attractive features. Potential growth in cash value is linked to market index performance, with guaranteed floors to protect against loss in down markets. 

Advantageous Attributes

IUL insurance is designed to facilitate not only tax-deferred growth, but also tax-free income (based on current tax law) when distributions are properly structured. It’s important to always consult a qualified tax expert when evaluating individual circumstances – and it’s crucial, as well, to know that just as people have multiple, evolving needs, multiple types of IUL insurance are available.

For example, one type of IUL insurance product is designed to offer growth and income potential. This type of robust solution may be most attractive to people ages 35-55 who are seeking accumulation as well as multiple options to optimize income distribution. Accessed cash value from an IUL insurance product can be used for any purpose, such as:

•        supplementing retirement income,
•        covering health care expenses,
•        starting a business,
•        paying for college or wedding expenses,
•        funding a vacation, or
•        creating emergency funds.

Another type of IUL insurance product, designed as an economical alternative to guaranteed universal life (GUL) insurance, focuses on guarantees while offering the potential for cash value growth and income. This type of solution may be most appropriate for people ages 40-70 who are seeking death benefit protection for income replacement, wealth transfer or estate planning.

Solutions with Utility

Some IUL policies also feature integrated or optional riders designed to further transform the products into “life insurance you don’t have to die to use.” Even affluent people may appreciate the potential to access living benefits, in the form of an accelerated portion of the policy’s death benefit, in the event of a chronic illness (permanent or not) or longevity (and given that the terms of the contract have been met).  

With its many opportunities for customization, IUL insurance sometimes has been described as having lots of “moving parts” – and although the product is indeed built for performance potential, understanding the distinctive choices and how they are designed to work doesn’t have to be complicated.

In fact, new online educational resources have been introduced to help explain the impacts that various situations and contingencies may have on retirement readiness, and how an IUL insurance policy, along with built-in or available riders for various needs, may serve as a solution.  

For more details about modern IUL insurance, please contact MVP Financial Services, Inc. 

Policies issued by American General Life Insurance Company (AGL) except in New York, where issued by The United States Life Insurance Company in the City of New York (US Life). Issuing companies AGL and US Life are responsible for financial obligations of insurance products and are members of American International Group, Inc. (AIG). Products may not be available in all states and product features may vary by state. Guarantees are backed by the claims-paying ability of the issuing insurance company.

AIG is the marketing name for the worldwide property-casualty, life and retirement, and general insurance operations of American International Group, Inc. For additional information, please visit our website at www.aig.com. All products and services are written or provided by subsidiaries or affiliates of American International Group, Inc. Products or services may not be available in all countries, and coverage is subject to actual policy language.