Can you use your Life Insurance in your Retirement Plan?

Can someone use their life insurance in their retirement plan?

Let’s first explore what retirement looks like these days.  For clarification, the main difference between a strictly unemployed person and a retiree:  Someone in retirement currently has some type of income.  This retirement usually comes in one of two different ways:

  1. Either a pension or some type of investment like a 401k or IRA.
  2. Government funds such as Social Security.
  3. Saving a lump sum of money and withdrawing from it regularly, such as an inheritance or an annuity.

For the example below, let’s assume you don’t have a pension from your company nor a 401k or IRA. In this scenario, your retirement would be 100% dependent on your savings.

The amount you require to successfully retire is dependent on two main factors:

  1. The annual income that you desire during your retirement years.
  2. The length of time you desire to have that income aka as RETIREMENT YEARS.

To keep things simple, say you want to retire at 65 years old with the same retirement income per year as your pre-retirement income per year – $50,000. According to the World Bank, the average life expectancy in the US is 79 (as of 2015).¹ Let’s round it up and call it 80 for our example which means we should plan for income for a minimum of 15 years. (For our purposes here we’re going to disregard the impact of inflation and taxes to keep our math simple.) With that in mind, this would be the minimum amount we would need saved up by age 60:

$50,000 x 15 years = $750,000

There it is: to retire with a $50,000 annual income for 15 years, you’d need to save $750,000. The next challenge is to figure out how to get to that number (if you’re not already there) the most efficient way you can. The more time you have, the easier it can be to get to that number since you have more time for contributions and account growth.

If this number seems daunting to you, you’re not alone. The mean savings amount for American families with members between 56-61 is $163,577² – nearly half a million dollars off our theoretical retirement number. Using these actual savings numbers, even if you decided to live a thriftier lifestyle of $20,000 or $30,000 per year, that would mean you could retire for 8-9 years max!

One option that you could consider is a tool that you don’t normally consider when preparing for retirement.  Your life insurance policy.

One of the benefits of a permanent life insurance policy is the ability to accrue “cash value”.  In its simplest form, the cash value within a policy is the balance remaining after a portion of a premium payment is applied to insurance costs.  It is this feature that provides a few different uses for life insurance in retirement. The cash-value account grows over time and can be withdrawn as a source of income as long as the withdrawal amounts don’t exceed the amount paid in premiums.

Another option is to borrow from the cash value.  Think of it as a loan you are getting form your future self.  Technically, you’re not required to pay it back, although it will accrue interest and ultimately the loan amount will be deducted from the death benefit  (which is the amount paid to your family upon your death).

This brings up another discussion point:  Term Life Insurance.  This is life insurance that does NOT provide a cash value option, does not have a withdrawal or borrow opportunity but it DOES provide a death benefit coverage for your beneficiary(ies).  If your term policy is close to expiring or you only have a term policy through your employer, you need to obtain a new illustration to see what the cost might be in your retirement years and even IF you can qualify at that point.  Weighing out the cost now for your current self, versus the cost your future self could pay has to be considered now.

All of this information may be hard to hear for the first time, but it is the first real step to preparing for your retirement.  Knowing your number gives you an idea where you want to go.  After that, It’s figuring out a path to that destination.  If retirement is one of the goals you’d like to pursue, let’s get together and figure out a course to get you there — no math degree required!

Sources:
¹ “Life expectancy at birth, total (years).” The World Bank, 2018, http://bit.ly/2I8w4gk.
² Elkins, Kathleen. “Here’s how much the average family in their 50s has saved for retirement.” CNBC, 4.21.2017, http://cnb.cx/2FX0Ckx.

₃  Investopedia. Do You Need Insurance After Your Retire? Tim Parker. January 7, 2016.

 

Why would someone choose Short Term Life Insurance?

Why would someone choose Short Term Life Insurance?

Short term life insurance might be a good fit if you have short-term goals or want financial protection for a specific amount of time. Reasons for utilizing short term life insurance might be one of the following:

  1. If you have a 20-year home mortgage, then you may want to purchase a 20-year term policy. That way, you will know that your family can pay off the mortgage and remain in their home should anything happen to you.
  2. A term policy might also be a good option if you want insurance coverage just for the years you are paying for a child’s education.
  3. Maybe you are paying off a business loan and you don’t want a spouse or partner to be burdened with the balance.
  4. Additionally, If you are a small business owner, term insurance can be used to protect against the untimely death of a key employee.

In each of these examples, the term ends along with your specific financial obligation, so you are not paying for coverage that you no longer need. For that reason, term life insurance can be a flexible and affordable coverage solution for a range of situations.

Are there Differences Among Term Insurance Policies?

The biggest differences between term insurance policies are the length of time the coverage is for. Some term policies offer optional features called riders that allow you to customize your policy. For example, you can add your children to your policy or get accidental death protection if need be.

Moreover, a term insurance policy can be increasing or decreasing.  A decreasing term life insurance policy would best be used to cover the life of a homeowner for the death benefit to cover for a mortgage.  For example, the primary breadwinner of the family and their spouse is on the deed and the mortgage.  The primary breadwinner passes and leaves the mortgage debt to the stay-at-home spouse.  In this case, the 2nd spouse would need to either go get employment to make the income to pay debts, including the mortgage, or lose the house and possibly all the assets or (worse case scenario) marry immediately so he/she can have another primary breadwinner to fill the financial void.  The decreasing term insurance death benefit can be used to pay off the mortgage and possibly all the other debts as well, leaving the stay-at-home spouse to effectively grieve and move into the next season of life without much worry or unnecessary anxiety.

Increasing term life insurance could be used in the case of having several children that might accrue education debt in future years and the parents feel as though they want to cover the cost.  In the parents’ demise, the increasing term death benefit would be able to cover the entire cost (if not a large portion of the cost) of the children’s education cost without worry or unnecessary anxiety.

At this point, it is important to note one unique type of term life insurance policy which is what is known as a return of premium term policy. With this type of policy, all premiums that have been paid are returned to the policy owner at the end of the level-premium period (terms and conditions may apply).

What Happens at the end of the Term of a Term Life Insurance Policy?

At the end of the term, you have the option of letting your coverage end, keeping it by continuing to pay the premiums, or possibly converting it to some type of a permanent life insurance policy.  We discuss various types of permanent policy options in another blog. Remember, if you do choose to convert, be sure to work with a reputable company that offers quality life insurance options.

If you choose to keep the policy after the level-premium period ends, your premiums will increase each year as outlined in your contract and usually will stop at age 85, unless otherwise indicated when the policy ends.

How Much Term Life Insurance Do I Need?

As a general rule you should purchase a term life insurance policy for 10–12 times your annual income. That way, your salary will be replaced for your family if something happens to you.

And don’t forget to get term life insurance for both spouses, even if one of you stays at home with the kids. Think about what you would pay in childcare and home upkeep costs if the stay-at-home parent was gone! No matter what, you both need term life insurance.

Want to make sure your family is covered no matter what happens? Check on your coverage BEFORE it becomes an emergency.

Most financial professionals recommend that if you decide to buy a term policy be sure it is with a term that will see you through until your kids are heading off to college and living on their own. That might be anywhere from 20 years, if you already have children, to 30 years if you do not have children or aren’t finished adding to your family yet.

A lot of life or death can happen in 20 years.

Don’t Wait Until You Need Life Insurance to Get It

The truth is, we cannot see the future and aren’t promised tomorrow. Life is precious! And the ideal time to buy life insurance is when you are young and have a clean bill of health. Especially since life insurance companies are all about weighing the risks of the person purchasing the policy.

Our strong opinion is that you should get your term life insurance policy, as much as you can afford to cover as much of your family’s needs, as possible. (In hindsight timing is everything).  Then take as many funds as you possibly can, immediately set up your emergency fund and then set a short term plan to push hard to put as much as you possibly can in a very wise (and fully proven) investment to allow your money to grow in your sleep!  That way you can begin building your nest egg.  Unless you can imagine yourself working until the day you die, then why not work now while you can in order to prepare for those later years so that you can actually enjoy the fruits of your labor.

Covid19 Happened After You Planned 2020

Rewrite Your Business Process for the Next 90 Days

These current Covid 19 times have really stopped all of us small business owners in our tracks.  We had to throw out the business plan we just did at the first of the year and start all over.

Here are some practical TIPS to implement for success.

1.Take Your Meds! 

I don’t mean prescription drugs!  You have heard the saying “put the oxygen mask on you first, then you can help others.”  Well that is what taking your MEDS is about.  It is a metaphor for meditate, exercise, diet and sleep.  These are key to our overall health and wellness and staying on track for long term success in life.

Meditate – we are in a high stress environment and situations with all of our social and business changes.  Meditate, pray, breathe … create space where you can unplug and have quite time to clear your mind.  Take time to set the tone for the day or remove all the negative energy or to simply calm your thoughts and prepare for the day or end the day if needed.

Exercise – it could be getting in your 10K ‘steps’ for the day and for some of you it could mean your thirty minutes to an hour of a good solid work out routine.  Some are doing virtual exercise groups.  Wherever you are in your exercise journey, make sure you are creating time an a routine to fit in a healthy exercise routine.

Diet – we are what we eat! Make sure you are eating for energy.  Research options to make sure you are feeding energy to your mind and body.

Sleep – studies tell us that 7+ hours of sleep allow the mind to detox and wash out and to be ready for the next day!  We should all do the best we can to take care of ourselves.  Don’t be that person that becomes the energy-sucking vampire.

  1. Make Sure Your Finances Are In Order!

This is part of the safety equation, too.  Make sure you are getting the facts and truth.  Scrub your expenses hard and fast if you haven’t already and make sure you are working with a P&L.   Talk to your CPA or Financial Professional.

  1. Keep Your Business Moving Forward!

That means yes you can continue to market BUT with the right tone and messaging.  Plan out what you will do over the next 30 to 90 days.  What videos you would like to do?  What emails are you going to send?  What marketing campaigns are you going to implement?  No matter what you decide in form of marketing just make sure you are sharing the right tone and message.   If you have billboards make sure you update them to say #WeCare.  Support your local community and make it meaningful.  You don’t have to stop your marketing, simply make it meaningful.  If things are still a little somber in your area, then launching out with a ‘party like’ tone will not be received very well.  Take things seriously and make sure you are matching your message to the right tone needed.  If people are still scrambling for work and still in a social distancing requirement, address your audience accordingly.

  1. Go Virtual!

You have adapted by now to the virtual arena, I hope! Skype, Zoom, Google hangouts, etc.  Embrace it and get comfortable with it.  It will be here to stay.  I don’t believe we will go back to the way it was after this.  Many businesses have had to adapt to the work from home and virtual systems.  There are many cost savings and ease of conducting business involved that make this advantageous.

Tony Robbins says there are always two kinds of people:  Those that BLAME the resources and those that ARE resourceful!  Which are you?  Are you coming from a fixed mindset or a growth mindset?  People in the past would resist doing videos and now everyone is doing it! Those that adapt to change are the ones that survive and thrive.

  1. Load The Cannon!

Yes, you generate leads in this environment.  How are you educating people today?  How are you staying up on your industry trends and ever-changing market conditions?  Plan how you will nurture your leads.  Check in to see how people are doing.  Show compassion and empathy.  If business comes out of it, that’s great but at least you kept the relationships alive and current.

  1. Sharpen Your Axe!

Especially if your area is still practicing social distancing, you can take some time to sharpen your skills.  Do you need to upgrade your tech skills, your negotiation skills, and marketing skills?  Now’s the time!

  1. Adjust Your Tone!

Have you double-checked the automated systems that are sending out messages and emails to make sure you have updated those messages to match the tone needed now?  Make sure you are relevant and current.

 

So you had big plans for 2020?!  Then Covid 19 happened.  Well, time to revamp, restructure and rewrite.    If you have more tips to add, please share them.  All of us small business owners need to pull together and help each other now more than ever!  Here’s hoping these tips have helped.

 

The Financial Literacy FAIL

Financial literacy fails because it addresses only one problem:   It focuses on facts and figures while largely ignoring behavior.

This is insane.

This is like promoting sex education that talks about penises and vaginas while never discussing what it’s like to be madly in love with somebody so in love that your brain stops working and you just end up being ‘CLOSE’ anyway.  For sex education to be effective, it has to deal with real-world circumstances and behavior.  It has to teach about psychology and emotions, not just body parts!

The same is true with financial literacy.

Literacy = “… the ability to use printed and written information to function in society, to achieve ones goals, and to develop one’s knowledge and potential.”

  1. Folks are too influenced by a barrage of media, admitting they are influenced by it but ADMIT and recognize it and then NOT fall prey to the temptation to buy just because they have great marketing.
  2. THINK about spending. Ensuring that each dollar has a purpose before it even comes into their hand.   Stop spending on impulse and be deliberate about where those dollars go.

Instead of teaching Americans about credit cards and rates of return, we need to be teaching them about behavioral finance.  We need to be showing them how to break free from the marketing messages that are all around.  We need to be showing them how to set (and achieve) personal goals, especially financial goals.  We need to teach skills like conscious spending.

Ultimately, if we want Americans to be smarter with their money, we need to encourage them to consume less media — to avoid advertising — and we need to teach them to master the emotional side of personal finance.  We need to show them how to change their BEHAVIOR.  We need to appeal to their self-interest.  We need to help them find intrinsic motivation to save.

Each of us needs to dig deep inside to find what it is that’s important to us, what it is that brings us joy, and we need to prioritize that instead of all the other garbage.  I’m not suggesting that we abandon traditional financial literacy completely. But I think a constant push for more financial education is a waste of time and is not enough.  To truly be successful, financial education has to address the behavioral side of money because that is absolutely the biggest piece of the puzzle.

What do you think?  Have you seen this happen in your life?   Leave a comment below.