By Sidore Ogoussan
The title of this article may sound mystifying, especially if you’re not ready to think about retirement income. That’s why you may want to instead focus on Michael’s mistake.
Michael W. is a real person who has agreed to share his story with you, which is about a mistake of omission, not commission. In other words, it’s about something he did not do.
But let’s not get ahead of ourselves. We’ll get back to Michael’s mistake in a moment.
This article is about using permanent life insurance to build more retirement income — beyond what are always talked about as the traditional methods: IRAs, Roth IRAs, 401(k) and Roth 401(k) plans, as well as various plans for the self-employed. For purposes of this article, we’ll discuss individual retirement only.
Of course, let’s not forget the number one reason for life insurance: tax-free death benefit proceeds that will be paid to the beneficiary if the insured dies while the policy is in force.
But did you know?
Permanent life insurance provides coverage throughout the insured’s lifetime, as long as premiums are paid as stated in the policy. It also provides an income element through loans and withdrawals from a policy’s cash value build-up.
Permanent life insurance can take the form of what is called whole life insurance, in which the policy remains in force, provided the fixed premiums are current, until the insured dies, or universal life insurance, which is characterized by flexible premiums and flexible face amounts. A form of the latter, variable universal life insurance, adds the element of investment flexibility managed by the policy owner.
Remember that, generally speaking, tax-advantaged loans and withdrawals from a current life insurance policy will reduce the death benefit and policy values and may cause the policy to lapse without additional premiums being paid. Under certain circumstances, the withdrawals may be taxable.
It turns out life insurance is versatile. You can take loans and withdrawals from your permanent life insurance policy, and you can take them for many needs. This feature is often characterized as the “living benefits” of life insurance. One of those living benefits for you could be supplemental retirement income.
So can you guess Michael’s error of omission?
Bingo! Michael never purchased permanent life insurance. Had he done so when he was younger and in good health, he would own a valuable life insurance policy years later.
But he didn’t know that this was a good financial move until his health had deteriorated and he was not able to purchase life insurance economically.
That was OK until two job layoffs later when he realized he had not quite put aside all he wanted for retirement — particularly in this new era of defined benefit contribution plans versus defined contribution plans (typically company-paid pension plans).
It sure would have been nice for Michael to be able to tap into the cash value of his permanent life insurance policy for additional retirement income or other living benefits.
So in this case, we ask that you not be like Mike. Take advantage of one of the least-talked-about yet most valuable financial vehicles — permanent life insurance.
Isidore Ogoussan is a financial adviser at 1847Financial in Conshohocken.