Blog #166: The Retirement Cost of Ignoring Life Insurance
(Part 1 of 2)

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Bob Ritter's blog 166 image 1 a self-employed clinical psychologist is planning to start an IRA

Note:  If your clients ignore life insurance in their retirement planning, they are putting their spendable retirement cash flow at risk.  Read on for the proof!

Case Study

Erin Coppola is age 30.  She is a self-employed, clinical psychologist and is planning to start an IRA.

Erin is visiting with her financial adviser, “I can contribute a deductible $5,500, right?”

That’s correct, Erin.  And when you reach age 50, that increases to $6,500.”

“How do I maximize the results at retirement?”

“You can contribute to it until you are age 70.  After that you must start taking taxable money out.  In some numbers I prepared for you, I scheduled the maximum deductible contributions of $5,500 for 20 years increasing to a deductible $6,500 at age 50 – and I extended those contributions all the way to age 70.  You don’t have to do that for all those years, but I wanted to show you the maximum possible results.”

“What are the results?”

“You can start the cash flow any time after age 59 1/2, but starting at age 70 produces the greatest amount -- it produces $45,316 in annual spendable cash for the next 30 years for a total of $1,359,480.”

Image 1
IRA Analysis

Bob Ritter's blog #166 IRA Analysis

Click here to review the year-by-year numbers.

“$45,316 a year of cash flow looks pretty good,” comments Erin, “any alternatives?”

“Erin, there is a variation that could provide a better solution.”

“Tell me about it.”

“Life insurance.”

I don’t need any life insurance.”

“You probably mean you don’t need the death benefit, and that may be true now.  But you may change your mind about the rest of the policy’s benefits after I show you an illustration of Indexed Universal Life – which I’ll refer to as Indexed UL or IUL.  The premium for the policy is set to the after tax cost of your IRA contributions, so your out-of-pocket cost is the same for both the IRA and the IUL.  The main difference at retirement is that, unlike the IRA, cash flow from the IUL is not taxable.  You’ll see that the same spendable cash flow is produced by both the IUL and the IRA.

“The same $45,316, right?”

“Yes, the same $45,316.”

“Then what’s the difference?”

“Almost $4,000,000 in favor of the IUL.”

Image 2
IRA vs. Indexed Universal Life
(Identical Spendable Cash Flow)

Bob Ritter's blog #166 IRA-vs-Indexed-Universal-Life-Identical-Spendable-Cash-Flow

Although the spendable cash flow is identical, the residual value of the IUL’s cash value exceeds the IRA’s value by $3,901,716.

Click here to review the year-by-year numbers.

Erin remarks, “That means I could have even more spendable money from the IUL.”

“Exactly.  Let’s take a look at how much more.”

Image 3
IRA vs. Indexed Universal Life
(Additional Spendable Cash Flow from the IUL)

Bob Ritter's blog #166 IRA-vs-Indexed-Universal-Life-Additional-Spendable-Cash-Flow-from-the-IUL

The IUL can produce $83,590 in spendable cash flow for 30 years.  The IRA, endeavoring to match that number, is depleted after just ten years.  That is $1,650,699 of essentially free money created by the use of the IUL with no corresponding increase in funding costs.

Click here to review the year-by-year numbers.


Any client that eliminates cash value life insurance as a funding resource for retirement cash flow is effectively saying, “I don’t mind putting my retirement cash flow at risk.”

For those with deductible retirement plans, using IUL can mean either more net worth or more spendable cash flow with no increase in contributions.

If you can produce these results for a $5,500 IRA contribution, imagine what you can develop from an $18,000 401(k) contribution.  Or a $60,000 Solo 401(k) contribution for an eligible participant.  Or a $120,000 Solo 401(k) contribution where a couple are both eligible.  Or a $250,000 Profit Sharing contribution covering several executives.  If you concentrate on just these markets, you will have access to an unlimited supply of qualified prospects who will be extremely interested in free money once you show them how to create it.

Every case can be backed up by our illustration logic that compares continuing contributions to the retirement plan to redirecting the after tax cost of those contributions to life insurance premiums leaving current balances in the retirement plan untouched.

InsMark illustrations can also assist you with aspects of your DOL compliance since the calculations show you are acting in the client’s best interest in recommending cash value life insurance as a supplemental retirement savings alternative.

Below are additional advantages when life insurance is used:

  • Unlike contributions to deductible plans, there are no federally mandated limits to premiums for life insurance (and once this is understood, many clients will increase their funding for the life insurance);
  • Unlike contributions to deductible plans, a waiver of premium can be attached to life insurance in the event of disability;
  • Unlike the deductible plans, tax free cash flow from the life insurance (withdrawals to basis and/or loans) can be accessed prior to age 59 1/2 with no 10% premature distribution tax;
  • Unlike the deductible plans, life insurance also provides a significant death benefit (in excess of $500,000 for Erin).

Roth IRA
In Blog #167, I’ll compare a Roth IRA for Erin in place of an IRA.

I am again reminded of Bill Boersma’s classic comment in his article in the December 2014 issue of Trusts & Estates in which he discusses life insurance as an asset class: “I can only wonder if another asset with the same qualities would be implemented more frequently if it wasn’t called life insurance.”

One last comment:  For those individuals (many of them millennials like Erin in single households) who don’t have a clear need for a current life insurance death benefit, it may be useful to suggest a revocable charitable beneficiary for all or part of the death benefit.  Click here for more information about how to do this this.

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Sam Keck, MBA, CLU, CFP, LUTCF, InsMark Platinum Power Producer®, Financial Planner, Denver, CO

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Frank Dunaway, III, CLU, Legacy Advisory Services, Carthage, MO


Important Note #1:  The hypothetical values associated with this Blog assume the nonguaranteed values shown continue in all years.  This is not likely, and actual results may be more or less favorable.  Life insurance illustrations are not valid unless accompanied by a basic illustration from the issuing life insurance company.

Important Note #2:  Many of you are rightly concerned about the potential tax bomb in life insurance that can accidentally be triggered by a careless policyowner when policy loans are present.  Click here to read Blog #51: Avoiding the Tax Bomb in Life Insurance.

Important Note #3:  The information in this Blog is for educational purposes only.  In all cases, the approval of a client’s legal and tax advisers must be secured regarding the implementation or modification of any planning technique as well as the applicability and consequences of new cases, rulings, or legislation upon existing or impending plans.

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