When Social Security Isn't Enough Turn to Life Insurance
When should you begin to plan for your retirement? I suggest that personal retirement income planning should begin the first day on your first job of your working life. Few people realize their mistake in postponing planning until they are a few years away from needing the income. That’s generally the time when clients begin to request Social Security benefit estimates and realize they need more money coming into their household than their social security benefit provides. During that time of panic, the tendency is to force-feed every available penny into high-risk investments. Then, if the market takes a downturn, the panic level raises and decisions such as working longer, taking a part-time job in retirement or reducing their standard of living must be made. With the proper planning, all of this could have been avoided many years before.
The replacement ratio of Social Security benefits to covered wages is approximately 32% at retirement.1 The average client believes that he or she needs 60% of their pre-retirement income to enjoy retirement. The math alone tells us that he’ll need to supplement his income by 28% to reach his goal. This may be achieved through a pension plan; however many corporations no longer offer this benefit. The next choice is personal savings. But before we work this angle, let’s consider how automatic deductions from the average Social Security check might reduce the monthly benefit. What deductions? Well, Medicare is free but the Part B benefit (doctor’s services) is not. The standard deduction for Part B Medicare is $110.50/month. For higher income individuals, this amount may increase.
There’s another reduction in benefit that clients may not have considered. Social Security benefits may be partially taxable depending on your total income from other sources. These sources, known as "Provisional Income", include tax-free interest from Municipal Bonds, taxable interest, and 50% of Social Security Income. If the client is single and income from the previous described calculation process is $25,000 or less, then his or her Social Security is not taxable. If the income is between $25,000 and $34,000, then 50% of the social security is taxable. If income exceeds the $34,000 level, then 85% of the Social Security income is taxable. For Married Filing jointly, the numbers are $32,000 and under non-taxable SS benefit, between $32,000 and $44,000, 50% of SS benefit is taxable, and over $44,000, 85% of SS income is taxable.
Income that is not subject to income taxation, or in the "Provisional Income" category, can be valuable as a supplemental retirement source. And that bit of information leads me to a discussion about the benefits of cash value life insurance policies. All cash within the properly structured life insurance contract grows on a tax-deferred basis, and the cash value of an overfunded life insurance policy is available for lifetime use without an income tax obligation, as long as the funds are accessed according to stated policy provisions and the policy does not lapse during life of the insured.
Stated differently, if you help your client plan ahead, a $35,000 annual income from a life insurance policy would provide the same benefit as a $50,000 income from a taxable source based on a 30% income tax rate (state and federal). In addition, this income would not be counted as “Provisional Income” in the Social Security analysis, which would mean that more of your client’s Social Security could be exempt from income tax liability. It sounds like they could have their cake and eat it too!
In order to build a supplemental retirement that will not be subject to income tax or be counted as "Provisional Income" when the client begins to receive Social Security income, clients need to plan many years prior to their retirement. The subject of Social Security income, and the interaction with other sources of retirement income, needs to be addressed very early in the planning process. One of the best services an agent could provide to begin this discussion is to assist the client in understanding the annual Social Security statement that is sent automatically to everyone age 25 or older who has paid Social Security taxes and has not yet received benefits about three months prior to their birthday. Armed with this information, you are in a strong position to emphasize the need for additional income at retirement age. The best way to save for this retirement is to utilize the many benefits of indexed universal life insurance. At the same time, the death benefit of the product will protect from a premature death, thus allowing the survivors to maintain their standard of living. If the insured client lives to retirement, the internal cash value of the policy can be accessed on a systematic basis to provide another paycheck.
Overfunding a policy designated for this purpose during the accumulation period presents the opportunity to take full advantage of the tax-deferred growth benefit of the contract. Exercise caution to prevent classification of the policy by the Internal Revenue Service as a Modified Endowment Contract. If the client is anticipating receipt of an inheritance or other lump sum that he wants to add to the life policy, plans should be made during the design phase to make certain the contract can hold this unscheduled deposit without triggering a MEC.
Annual reviews of the policy performance are critical to monitor the progress and keep your client apprised of the progress. Your Creative Marketing Life Sales Consultant is available to assist you in the case design process or to provide policy review kits for your client follow-up visits.
Eloise Glaspie
Life Sales Consultant
With more than 20 years of experience in insurance, Eloise is well versed in finding the right product to suit your clients’ needs. She makes a difference for her clients through her knowledge and her outstanding service, both key to good business practices. Her personal goal: Growing Creative Marketing’s Life Department to better suit the needs of our affiliated agents.
FOR AGENT USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC 11124-2010/7/08 | 16557 1902410
1http://www.ssa.gov/pubs/10070.html
Guarantees provided by life insurance are subject to the financial strength of the issuing insurance company; not guaranteed by any bank or the FDIC. Agents may not give tax, legal, accounting or investment advice. Individuals should consult with a professional specializing in these areas regarding the applicability of this information to his/her situation.