7 October 2013 0 Comments

Using Life Insurance Cash Values At Retirement

cash value at retirementOur 65 year old is thinking about retiring in another 5 years.  He’s in great shape…plans to live for a long time…but has done little to plan for the event.

He owns a life insurance policy with some cash value, but because interest rates have dropped the cash is also dropping.  Soon he’ll have to pay more premium to keep it going.  He wants some life insurance, but right now retirement income is on his mind.  He asked his agent to provide calculations for a reduced policy and apply the cash value toward retirement as I illustrated in my last entry, but the numbers just didn’t seem to workInstead he applies for a new Indexed Universal Life under a Section 1035 tax-free exchange and qualifies for the best underwriting class.  He stops paying all life insurance premiums.  Based on one company’s projections, here’s what he might expect to get:

  • Death benefit for the next 5 years equal to 215% of the cash transferred from the old policy.
  • Annual income beginning in the 6th year, payable for 20 years, equal to 5.77% of the original cash transferred.
  • If death occurs during this income paying period income stops, but there is a death benefit that starts at 210% of the original cash transfer in the 6th year and reduces annually reaching 95% in the final income payment year.
  • If he is still alive after the income payment stops, there is still a death benefit that has reduced to 69% of the original cash transfer by the time he reaches age 100.

These payout percentages would vary based on the amount of funds transferred and the underwriting class of the insured.  Benefits are not guaranteed, but are tied to an outside index (S&P 500).  Interest earnings assumed in the above benefits are tied to a 25 year history of the S&P 500.  None of the cash is subject to income tax based on these assumptions.  None of the income is counted toward Combined Income for calculation of tax on Social Security payments.  Plus—there is always some life insurance death benefit.  Life insurance cash values might be a great assist in your retirement planning.

Next… some nuances and traps to avoid when surrendering old policies.

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