Later-life benefits of buying insurance now are enormous

People retire with a nice little nest egg, hoping to live out the rest of their days doing what makes them happy. Over the course of their retirement, some realize that the spending — the de-accumulation of assets in order to maintain the quality of life — is occurring at the pre-retirement rate. As often as not, many become wary of taxes eating away at the decumulation, apprehensive of future sustenance. Those relying on qualified accounts for spending become particularly prone to high taxes. By then, however, the window of opportunity to achieve tax-adjusted returns and facilitate spending will have almost shut. 

Therefore, forward-thinking professionals and their advisors are increasingly subscribing to the idea that retirement decumulation is the new accumulation. That approach posits the creation of an insurance-investment portfolio with long-term participation. Though guaranteed savings plans — non-participating insurance products with assured benefits after paying premiums for a pre-determined period — can give decumulation a boost and offset against taxes, their returns pale in comparison to the cash values and payouts that permanent life insurance products can bring. 

Permanent life insurance provides the much-needed tax break

Permanent life insurance policies provide lifetime coverage. By surrendering the policy at any point, the policyholder can receive the cash values accrued tax-free thus far. Moreover, permanent life insurance can be collateralized to secure loans. That is to say, such products serve the dual objective of investments and insurance. As per the need for higher flexibility in terms of premium, coverage, and interest rates, people can buy either universal life or whole life insurance. 

Subvariants like indexed universal life allow policyholders to link the cash value to a stock market index, such as the S&P 500, with the option to add different weight to fixed-income or equities. Likewise, private placement life insurance (PPLI), offered privately rather than through a public offering, allows the cash component to be linked to hedge funds and other alternative asset classes, giving investors an avenue to reap significant, tax-efficient rewards. Due to its inherent advantages, PPLI is typically offered by invitation only and to HNWIs. 

Research-backed benefits of whole life insurance

Universal life offers high flexibility but requires more responsibility. Conversely, whole life insurance is more straightforward and predictable and provides assured returns, hence viable for conservative investors. As the cash values increase on a tax-deferred basis without being susceptible to market conditions, whole-life products are highly preferred, especially in the context of retirement decumulation. Rest assured, retirees have a clear-cut perspective of what they stand to gain in later life. 

In a comprehensive study, EY learned that a retirement strategy with whole life insurance consistently delivered higher returns and a greater legacy than an investment-only portfolio. Delving deeper, the study found that a 30/30/40 mix of whole-life insurance, an annuity plan, and investments generated 5.4% higher annual retirement income and 18.7% greater legacy than an investment-only portfolio. An annuity plan, such as a deferred income annuity, can be likened to social security, wherein a series of payments to a company culminates in a steady income stream in later life. “Annuatization” or payout typically starts a few years after the first payment and continues in perpetuity unless structured otherwise. 

Insurance at the core of tax-efficient estate planning

People who haven’t undertaken estate planning tend to do so in retirement. Soon, they learn about inheritance tax (IHT), which they or their beneficiaries are liable to pay. Under that scenario, existing permanent insurance and its accrued cash value can be used to offset future IHT. However, if estate planning is done proactively, permanent insurance can be written into trusts, with tax-free payouts effectively earmarked for various purposes, including IHT. 

For example, an irrevocable life insurance trust (ILIT) can hold the policy of the owner. So, following the owner’s passing, the payout passes on to the beneficiary (named as a trustee) without any tax. Unlike in a standalone life insurance policy, where the beneficiaries could be subject to local taxes, ILITs remain largely outside the purview of taxation. When such measures are in place, retirees can not only decumulate without stress but also safeguard themselves and the beneficiaries from probable risks down the road. To learn more about how insurance fits into your retirement planning, please drop a mail to xxx.

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