Most Americans who have been working for their entire adult lives have some plans regarding their retirement. Of course, many companies these days offer their employees an easy option to save in the form of a 401(k) or an individual retirement account (IRA). As an insurance provider, it’s likely your clients already have an IRA or 401(k), but do they understand that those accounts aren’t failsafe?
As an insurance provider, it’s likely your clients already have an IRA or 401(k), but do they understand that those accounts aren’t failsafe?
When 401(k)s aren’t enough
If your client has spent the last few years – or decades – putting pre-tax or deductible contributions in their retirement accounts, they probably have a passing understanding of how those accounts work. The benefit of a 401(k) or IRA is that these accounts promote tax-deferred growth under the assumption that tax rates are higher when they make the contributions than when that money is withdrawn. Usually, this is a sound strategy, but what if tax rates are currently at historically low rates and will be significantly higher in the years to come?
You should explain to your clients that the maximum marginal tax rates rose recently, which means the alternative minimum taxes will have a strong effect on middle America. Because the top federal income tax bracket has been greater than the current rate for 63 years out of the last century, your clients need to understand that rising tax rates may have a negative effect on their retirement savings. Therefore, you and your clients need to work together to make a plan that will minimize their tax bill during retirement.
While your clients will certainly have to pay taxes on their savings at some point, they can choose at which point they want to pay, whether that’s during contribution, accumulation or distribution. Of course, paying the least total money is ideal, but it’s important to note where their income places them in terms of plans they are qualified for. For example, if their modified adjusted gross income is more than $129,000 for single tax payer – $191,000 when filing jointly – your clients will not be eligible to contribute to a Roth IRA. So where does that leave your clients in terms of saving for their retirement?
Where life insurance comes in
Talk life insurance options over with your clients. While it is not likely going to be a stand-alone retirement option, it’s the perfect way to position a portion of their retirement assets to add death benefits and tax diversification to their portfolio.
Of course, retirement is an important consideration for your clients, but they also must plan for what would happen in the event of their death. With a quality life insurance policy, income-tax-free death benefits will be provided to your clients’ beneficiaries. There are also no defined annual IRS limitations on their premiums, nor is there a limit on gross income affecting their ability to contribute premiums. Missed premiums can be made up at a later time, and tax-deferred accumulation is permitted.
When structured properly, your client’s life insurance policy can save them significant amounts of money. For example, they may make distributions using loans and withdrawals income tax free and there is no 10 percent penalty tax for accessing policy cash values before age 59 1/2. They may also take distributions as needed, though there are no required minimum distributions for owners. Finally, life insurance policies are self-completing upon death.
For clients who need greater coverage than their 401(k) or IRA can provide, a life insurance policy can fill the gaps and promote greater tax diversification.
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