Life Insurance in Retirement Planning for High Income Individuals
The background
A husband and wife (ages 58 and 53) currently earn over $1,000,000 per year. The funding of their qualified plans is limited by IRS rules. Based on projecting their retirement savings, their current qualified plans will leave a shortfall when compared to their post-retirement income needs.
The couple would like to use their after-tax dollars to fund a plan which will provide supplemental retirement income.
Since they are in a high tax bracket, and expect to remain in a high tax bracket, the clients would like the plan to be as tax efficient as possible.
Their advisor engaged with Ash to determine if we could help the clients meet their retirement plan goals.
The problem
- High-income earning clients who have maximized qualified plan contributions
- Current qualified plans will not provide sufficient post-retirement income
- Need for a tax-efficient source of supplemental retirement income
Client profile
- High-income earning individuals or couples
- Excellent positive cash flow
- Current qualified plan funding is at the maximum allowable amount
- Current qualified plans are not projected to provide adequate post-retirement income
- Good to decent health
- Long horizon – maximizing life insurance for supplemental income is best used for horizons of 10-plus years
How it works
The clients were presented with two separate, individual indexed universal life insurance policies. The funding and structure of the life insurance was intentionally arranged in a way to mimic a Roth.
- After-tax dollars fund the life insurance policy until retirement
- Death benefit amount is minimized to reduce policy costs to the lowest possible level
- Policy cash values grow tax-deferred
- Properly distributed Income from the policy is received tax-free
- At death, any remaining death benefit amount is paid income tax-free to the policy’s beneficiary
The result
The clients chose to fund the wife’s policy at $100,000 per year for 10 years. The projected tax-free income generated by the policy was $94,105 per year for 25 years beginning in the 12th year.
Matt Erpedling has been with Ash since 2005, developing a broad-based understanding of life insurance and advanced markets strategies. His primary focus is answering advanced markets questions, working closely to develop strategies that tie in the proper product and design to fulfill client planning needs.
