Financial Literacy Series--Whole Life Insurance

I see this situation often in my practice--before the divorce, my client wasn't the person making the financial decisions for the family and now that she's single, she's trying to figure out how to establish financial stability for herself and for her children.  Suddenly, she has to decide how to invest her QDRO money--should she leave it where it is?  Should she roll it over into an IRA and pick different investment options?  What happens if she leaves it where it is and she loses money?  This is all she has right now for her retirement, and now she has to plan to fund her retirement alone.  And with legal expenses to pay off, and with the costs associated with establishing a new household, it's going to be awhile before she can afford to start saving aggressively for retirement.  She needs all of her cash flow right now just to make TODAY work for her and for her children, she can't think about 20 years from now just yet.

I've developed a three-part workshop to help women tackle the daunting task of making a plan that works within their cash inflows to manage their expenses and to save for their short-term and long-term financial needs and goals.  I've compiled three years of research and case studies to develop a proven approach for women to establish stability in their current circumstances and to prepare for their future needs independently.  Please find information about my upcoming workshops here and register to attend. In addition to the workshop presentations, homework, worksheets, exercises and the workbook, I'll be sharing this financial literacy blog series to discuss different financial products and how they can be used to meet certain needs and to play different roles within a financial plan. 

Whole Life Insurance

One of my favorite financial products to use in a financial plan is whole life insurance.  It's a contractual guarantee that your heirs will receive a legacy when you pass away.  This alleviates the need to reserve money from your cash and investment accounts to meet this particular goal.  Often my clients worry about what would happen to their children if they passed away prematurely--would their children be able to go to college?  Would their ex get remarried and have a spouse and more children to provide for, reducing the amount available for her children?  With a life insurance policy designated for her children only, my client's worries are alleviated.  Sometimes, my clients get remarried themselves and need to plan for their children in addition to planning for their new life partner in their estate plans and in their prenuptial agreements.  Whole life insurance is often a tool I use to help my clients navigate these important decisions.

There are other reasons to have whole life insurance besides the fact the death benefit is permanent and won't expire in 20 years or when you leave your job.  When you know your heirs will definitely receive money from an insurance company no matter when you pass away, you can plan to use your entire retirement savings for your own needs, and you can take more risk with your investments to build wealth for use during your lifetime.  By designing a whole life insurance policy using specific riders, I can plan to meet many needs with one product at different timeframes. I often add riders to whole life insurance policies to pay for long term care costs or critical illness expenses from the policy's death benefit.  Usually, this reduces the amount of money my client needs to save from her cash inflows (giving her permission to use her inflows for other purposes), and sometimes it means my client won't have to wait longer for retirement to recover from the financial disruption caused by the divorce.  Any reduction in savings needed to cover the costs of long term care or healthcare expenses in retirement adds money that can be used to fund life events and living expenses before retirement.  Also, I often design retirement income strategies that include using the cash value that builds over time from a whole life insurance policy.  I use insurance of all types in my financial plans to fill the gaps between my clients' cash inflows and outflows.

Whole Life Insurance and Retirement Income

When thinking about your retirement income, the first question to ask yourself is will your main retirement income be from taxable sources such as Social Security and a 401(k)? If so, are you looking for tax efficiencies and diversification in retirement? Let’s explore how whole life can not only provide you with death benefit protection, but also a number of tax advantages that may be surprisingly helpful to you in retirement. 

1. Tax-deferred growth
   Similar to the growth portion in your retirement accounts, the cash value¹ growth in a whole life policy is tax-deferred and you typically don’t have to pay taxes on it.
   
   
2. A tax-efficient source of supplemental retirement income
   A matured whole life policy with years of premiums funded and cash value growth can provide you with access to funds to supplement income in retirement through policy withdrawals up to the total premiums paid without incurring taxes.²,³
   
   A whole life policy is also insulated from market volatility. In tumultuous times, it may help to preserve the value of your market-sensitive retirement accounts as an alternative income source.

Planning ahead for your retirement is important and can be challenging when navigating your post-divorce financial challenges. Connect with me here to discuss your situation and how I can help you create financial stability.

^{¹ Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.}

^{² Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.}

^{³ Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.}

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