By Becca Craig, CFP
Congratulations! You’re officially retired. You’ve made it. You’ve crossed the metaphorical finish line. You’ve worked hard, diligently saved, and survived the ups and downs of the market. You’ve met with your financial planner to review your investment portfolio, retirement plans and Social Security benefits. You’re feeling confident in your strategies to create sufficient retirement income from a variety of sources. You’ve met with your attorney to update your estate plan and legal documents. You’ve even looped in your CPA on this major milestone to discuss the best way to file your tax return next year.
Perhaps not all those boxes are checked yet, but you’ve more than likely made progress on at least a handful of these planning items. And after years of suiting up and showing up, it’s only fitting that you begin to enjoy the fruits of your labor. As you get ready to close one major life chapter and begin another, you could find yourself in the (quite fortunate) predicament of owning permanent whole life insurance in retirement without a decisive “need” for it. Before you write off your permanent life insurance policy as a back-burner task you’ll eventually get around to, or hastily decide to surrender the policy for the cash, consider a few steps first.
Numerous aspects of a well-maintained life insurance plan are important to review regularly, including the type, amount of death benefit coverage, any cash value, and premiums. And you may come across myriad options for what to do with your permanent life insurance policy, from leveraging it to bolster your portfolio to using it to create tax-advantaged income streams in retirement.
But before you question what you ought to do with your policy (or feel understandably overwhelmed by your choices), first ask what you can do with it. If you’re retired, or very close to retiring, consider taking a few preliminary steps to put yourself in a position to make an optimal decision with your permanent life insurance strategy.
Get an In-Force Illustration
Most individuals would not implement a major allocation change to their investment portfolio without sufficient deliberation or purchase real estate without first conducting a thorough inspection. Prior to deciding what to do with an insurance policy, it’s important to understand what you actually have. While annual policy statements and policy documents are nice, the most effective tool for assessing the current state of your insurance policy is an in-force illustration (sometimes called an “in-force ledger” or very simply referred to as an “in-force”).
What Is an In-Force Illustration?
An in-force illustration is the only way to look under the hood of a policy by using its current values (cash value, death benefit, cost of insurance, expenses, and loan balance) to project future values. Retirees who purchased permanent life insurance 10, 20, or 30 years ago might vaguely remember sitting through a life insurance illustration presentation. That sales illustration was based on the (somewhat improbable) premise that policy earnings, insurance costs and expenses would remain constant, year after year. Retirees might be surprised – pleasantly or unpleasantly – to discover how different their original life insurance policy illustration is compared to the actual values today, however many years in the future.
How to Get One
If you’re still in contact (or know) your insurance agent, you can reach out and request an in-force illustration. You can also call the insurance company’s customer service line. It would be a good idea to have your policy number on hand before you call. While there are very few tasks more painfully arduous than navigating the many menus in an automated phone system, you’ll eventually reach a representative to make your request.
If the thought of calling customer service is too agonizing to bear (which is a valid perspective), some companies might allow you to request an in-force illustration electronically through an online portal (more on that later). The request must be made by the policy owner, which can sometimes differ from the individual insured. As a last resort, in-force illustration requests can also be made via snail mail by writing to the insurance company.
What to Ask For
While whole life insurance in-force illustrations are pretty straightforward, retirees might also find it beneficial to ask for an additional in-force ledger were the policy “paid-up.” Paid-up life insurance policies are policies that are paid in full, remain in force, and do not require additional premium contributions from the policy owner. Paid-up life insurance is only an option, however, with whole life insurance policies.
Because universal, variable universal, and equity-indexed universal life insurance performance is heavily supported by interest rates or the performance of investment sub-accounts, they are subject to lapse, resulting in no cash value and no death benefit. To understand your options, ask for three separate illustrations:
· An in-force illustration based on current assumptions maintaining the current premium in peripartum.
· An illustration based on the current assumed interest rate to a given insured age. The insurance company will then recalculate the increase or decrease in premiums to have $1 in the policy at the insured age you gave them to pay a death benefit.
· An illustration based on guaranteed assumptions to age 100. This will help you understand the premium if the insurance company credits the lowest guaranteed interest and raises the cost of insurance to the maximums.
These three illustrations in combination will allow retirees to conduct an evidence-based assessment of the cost-benefit of their policies.
Get Online Access
One of the major hurdles for retirees in assessing and utilizing their policies to the fullest potential is a lack of accessibility to the policies themselves. In order to execute any strategy, retirees should register for an account online with their insurance company. All major companies offer secure account portals, giving policy owners instant access to manage their policy details, change beneficiaries, and access cash value.
Life insurance death benefit proceeds pass through beneficiary designation, meaning they pass directly to the appointed individual, trust or charitable organization without income tax liability or probate. Verifying your policy beneficiaries ensures your desires are carried to fruition as you intend.
Consider Your Estate Plan
While life insurance death benefits are paid to beneficiaries income-tax-free, there are certain situations in which the total death benefit amount is included in the overall value of the insured’s estate and subject to federal and state (at least in 12 of them) estate tax. Estate taxes are paid by the decedent’s estate before assets are distributed to heirs, and are thus imposed on the overall value of the estate.
Work with Your Professional Team
Once you obtain in-force illustrations for all of your permanent life insurance policies, work with a trusted insurance agent, or enlist the help of an unbiased, well-versed attorney or financial planner, so the guidance you receive is based on what’s in your best interest. Make sure your insurance best reflects the specific goals and objectives you’ve identified in your financial life plan.
When it comes to creating and tackling a retirement readiness to-do list, set yourself and your permanent life insurance strategy up for success by completing the pre-work. If you’re retired, or very close to retiring, consider making a resolution in 2021 to get current, get access, and get intentional with your policies. The confidence in your plan, and peace of mind that follows, will pay for itself and then some.
About the author: Becca Craig, CFP®
As an advisor with Buckingham Strategic Wealth, Becca Craig, ABA, CFP®, combines her experience in wealth management with her background in public policy and risk management to better educate investors using a holistic approach to financial wellness. A champion and advocate of evidence-based planning, Becca enjoys making people’s money work for them – not against them – so they can focus on the people, endeavors and causes they care about most.
Important Disclosure: The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth®. This article is for general information only and is not intended to serve as specific financial, accounting, legal, or tax advice. This article is not intended to serve as a specific recommendation for any insurance products. Individuals should speak with qualified licensed insurance professionals based upon their individual circumstances prior to changing or purchasing insurance products. The analysis contained in this article may be based upon third-party information and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. IRN-20-1646
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