Retirement Game-Changer: The Role of Life Insurance

Can life insurance truly transform your retirement plan? Explore the often overlooked benefits of life insurance with Rob Wolf, as he uncovers its pivotal role in safeguarding your financial future on the Wolf Financial Podcast. From its potential as a tax shelter to its capacity for providing tax-free benefits to your heirs, we'll dissect how life insurance can be a cornerstone of both income protection and legacy planning. We'll also tackle the emotional and psychological hurdles many face when purchasing life insurance and why it’s frequently a product that's sold rather than eagerly bought.

In this episode, we delve into the strategic importance of life insurance during retirement, especially how it can help replace lost Social Security income and manage required minimum distributions. We'll also discuss the critical need to consult with tax, legal, or investment professionals to navigate the inherent risks of investing. This comprehensive look at life insurance aims to offer clarity and actionable insights, ensuring you make informed choices that bolster your financial well-being and long-term legacy plans. Don't miss this opportunity to fortify your understanding of how life insurance can be a game-changer in your retirement strategy.

Learn more about Wolf Financial Advisory:
https://www.wolffinancialadvisory.com/

Disclosure: Robert Wolf, James Koenig, Sara Wolf, and Michael Rock are investment advisor representatives of, and securities and advisory services are offered through, USA Financial Securities. Member FINRA/SIPC. Additionally, Amanda Opulskas and Adam Wallace are registered non-solicitors of USA Financial Securities, A registered investment advisor. 6020 E. Fulton St., Ada, MI 49301. Wolf Advisory Services and Wolf Financial Advisory are not affiliated with USA Financial Securities.

The strategies and concepts discussed are for educational purposes only and do not represent specific investment, tax, or estate planning advice. Investing carries an inherent element of risk and it is in everyone’s best interests to consult a tax, legal, or investment professional. The opinions expressed herein are not meant to provide specific investment advice or serve as a prediction for future stock market performance. Past performance does not guarantee future results. Securities and advisory services are offered through USA Financial Securities, member FINRA/SIPC. A registered investment adviser. Wolf Financial Advisory and USA Financial Securities are not affiliated entities.

Transcript

The Importance of Life Insurance

Voiceover 0:00

The strategies and concepts discussed are for educational purposes only and do not represent specific investment, tax or estate planning advice. Investing carries an inherent element of risk and it is in everyone's best interests to consult a tax, legal or investment professional. Past performance does not guarantee future results. Securities and advisory services are offered through USA Financial Securities member FINRA SIPC, a registered investment advisor. Wolf Financial Advisory are not affiliated with USA Financial Securities.

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Wolf Financial Advisory. When it's important to you, it's important to us.

Voiceover 0:40

This is the Wolf Financial Podcast. Here's your host, Rob Wolf.

Rob Wolf 0:51

Good day everyone. Rob Wolf here with the Wolf Financial Podcast, and today we're going to be talking about the most exciting topic life insurance. Wow, you know, life insurance is one of those topics that bring up some unique emotions.

Rob Wolf 1:02

I've had people say well, why do I care? I'll be dead, of course. That's when the other spouse kicks them and then says some choice comments right. So why life insurance? Why is it important to a basic financial plan and why would I even consider perhaps keeping life insurance in my portfolio well into my retirement years? Well, first and foremost, life insurance for those that don't know what it is is an insurance policy that covers the life of what's called the insured. So in my case, I have life insurance on me. So if I were to pass away, money would become available to my wife and my children to help replace the income that I would have been bringing in if I was alive.

Rob Wolf 1:52

So many a times you see people that end up having a lot of life insurance early in their lives because they have yet to make all of the income that they potentially could have made if they lived a long life right and plus, when you're younger, you tend to have more obligations. You got children that you're raising, you got debt, mortgage cars, college loans. You haven't been able to build up a retirement plan the way you had. So those are all reasons why people end up having life insurance. But why would I consider having life insurance as I get into retirement and as I get into my older ages?

Rob Wolf 2:43

Life insurance is one of the biggest tax shelters in the IRS code. Not many people know this. Life insurance is something where the IRS, believe it or not, limits how much money you can put into a life insurance policy. Now let me ask you this If life insurance was such a bad deal, why does the IRS limit how much you can put into it? Well, the simple answer is it's because it's a tax shelter. It's a tax shelter because it allows the money to grow tax deferred and you have access to the money on a tax favored basis. So if I want to take a withdrawal or a loan against my policy, I don't have to pay taxes on any of the gains that built up into the contract. And then ultimately, upon my death, whatever the net death benefit is, goes 100% income tax-free to my heirs.

Rob Wolf 3:56

That doesn't sound too bad, does it? So why all the angst when it comes to life insurance? Well, I think a lot of life insurance is usually sold, not bought, which just means somebody sitting across the table from you and they're trying to sell you on the idea of buying life insurance. Now, we all intrinsically know that we should have life insurance, but usually the only time we buy it is when somebody is actively trying to sell it to us. So the fact that it's in a sales situation where it's usually brought up can, in of itself, bring up a negative feeling. Right, life insurance, believe it or not, is actually purchased by the average person six to eight times over their lifetime. Most of those is because six to eight times they saw a life insurance agent and they were sold a policy. Right, that's neither good nor bad, but that's usually the experience that most people have with life insurance. But getting past that, getting past the process of buying life insurance, is the importance of owning life insurance.

Rob Wolf 5:28

I want you to think this through. I'm retired, I've built my retirement nest egg. Both me and my wife are drawing social security. Why would I need life insurance? Well, guess what happens when the first spouse dies? What happens? We lose a social security check, don't we? That's immediate income loss to the surviving spouse. Now, as long as that surviving spouse has enough other assets to be able to draw from, they're probably going to be okay. But if that surviving spouse only has a small amount left in their nest egg to pull from and they lost a big social security check, that could create a financial hardship for that surviving spouse A consideration why someone would want to carry life insurance into their retirement years. From a legacy standpoint.

Rob Wolf 6:36

If I have a million dollars of an IRA, I know all that money is going to be taxable. Let's assume that I only need to take the required minimum distribution, not because I need it, but because the IRS is forcing me to pull that money out. Need it, but because the IRS is forcing me to pull that money out and I'm having to pay taxes. I'm having to pull $35,000 out a year and pay taxes on it. What could I do with some of that required minimum distribution that I didn't need for my lifestyle? I could save it. That I didn't need for my lifestyle. I could save it. I could give it away right, or I could just put it in the bank, one thing that some people will choose to do with life insurance is they'll take some of that required minimum distribution and they'll buy life insurance with it $35,000.

Rob Wolf 7:41

The after-tax amount of that, let's say, is about $25,000. They take a portion of that $25,000 and they buy some life insurance. Let's say they buy half a million dollars worth of life insurance on that worth of life insurance on that. So now they die, the million dollars goes to the kids and it's all taxable. But they get this half million dollars of life insurance and how is it received? How's life insurance received? It's received income tax free.

Rob Wolf 8:16

Have you ever thought about when a heir receives money? Their natural instinct is to spend it, not defer it. We know that the proper thing for the heir to do with that million dollars is to stretch it and do proactive tax planning over the 10 years the IRS gives them to stretch it. If they have life insurance that they can receive income tax-free, they're not only going to have the income tax-free dollars to pay the taxes and the IRA distribution, but they will also have access to those dollars in a lump sum that will take care of their need for immediate gratification on that inheritance. We're all emotional creatures, we all want immediate gratification. And I will tell you this if you just leave the IRA to the kids, the vast majority of them are going to spend more of that IRA immediately, paying more in taxes than what they should have. So life insurance can be a wonderful vehicle not only to give tax-free money to the heirs to pay the taxes on the IRA distribution, but also to satisfy that itch that they're going to have for some immediate gratification of spending some of their inheritance.

Rob Wolf 9:58

A side note that many people don't realize that also comes with life insurance at older ages is many life insurance policies now are issued with chronic illness benefits, which just means if you were to become chronically ill, such as needing care in a facility or terminally ill, you can actually spend down the death benefit during your lifetime to go towards your expenses Very similar to what one would consider with long-term care. Now it's not considered long-term care insurance, but it is a benefit that acts like a long-term care benefit. This would be a wonderful benefit for those people that say you know what? I looked into long-term care. I don't want to spend my money on it because I may never have to use it, but I will tell you. If you have life insurance in your portfolio, somebody will get the benefit of that death benefit. It's either going to be your heirs if you die peacefully in your sleep, or it may be yourself. If you have a chronic illness, you have a stroke, you end up in a facility, you might be able to utilize those dollars to help pay for your expenses. So you don't have to spend down that million-dollar IRA in huge chunks at a time because you're not going to get any type of government assistance for your long-term care situation. If you have a lot of money, the government doesn't care. If you have a million-dollar IRA and you got to pull $150,000 from it every year to cover your medical long-term care expenses, they don't care. You just have to pay the taxes until you drop that IRA down to a very minimum amount. Then you'll get government assistance.

Rob Wolf 12:10

With life insurance. You can have that chronic illness benefit where you can access the death benefit not just the cash value and pull that down income tax-free in the event of a chronic illness, allowing you to meet with a elder care attorney to prepare on how to build and protect the rest of the portfolio should that chronic illness last longer than five years. All good reasons to own life insurance. Folks, life insurance is really an amazing miracle. It creates an estate when an estate is needed the most. It provides for those widows with children. It provides living legacies to heirs for many generations. I utilize life insurance in our portfolio planning all the time and it's something that, regardless of whether or not you think it may be appropriate for you, it should still be a conversation topic with your advisor. You don't want to leave any stone unturned, and if you do have life insurance, please make sure your beneficiary designations are correct so that the money goes to the people that you want it to go to. This is Rob Wolf with the Wolf Financial Podcast.

Financial Planning and Life Insurance Considerations

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Thank you for listening to the Wolf Financial Podcast. For additional information about our firm, please visit our website wolfadvisorieservicescom. Wolf Financial Advisory. The strategies and concepts discussed are for educational purposes only and do not represent specific investment, tax or estate planning advice. Investing carries an inherent element of risk and it is in everyone's best interests to consult a tax, legal or investment professional. Past performance does not guarantee future results. Securities and advisory services are offered through USA Financial Securities member, finra SIPC, a registered investment advisor. Wolf Financial Advisory are not affiliated with USA Financial Securities. The strategies described herein may not be available for all. Insurance companies may require an individual be approved by underwriting which ensures the applicant meets health standards determined by the issuer. Some strategies described herein are made possible by the use of policy loans against the cash value of the policy. Policy loans reduce the death benefit of a contract in the amount that is outstanding and may include interest as well. Employing a strategy utilizing policy loans has the potential to be classified as a MEC, which poses additional consequences.