This is Part 2 to a previous Client Story entitled "Why have life insurance after retirement?".
Ed started the conversation anew. "I do, somewhat vaguely, remember our previous conversation about life insurance after retirement. However, I don't remember that I was going to have to pay these life insurance premiums after retirement. It's hard for me to see how I can pay these premiums, and still have a reasonable retirement income."
"Ed, I know you're interested in learning ways to reduce or eliminate the life insurance premiums after retirement. There are several ways you can accomplish this, but let's talk about the most practical strategies that are available.
Use Whole Life Dividends
First, if your whole life insurance dividends are substantial enough, you could use these to begin reducing or paying the entire annual premium of the policy, so that your net out-of-pocket cost is reduced. If you have permanent universal life insurance policies, and the life insurance cash value is substantial enough, the excess interest may be able to pay your cost of insurance, so that you may also eliminate the annual premiums, or at least reduce them substantially. We found in our experience that if your life insurance cash value is approximately 30%, or even as high as 35% of the Death Benefit, there may be enough dividends or excess interest from the policies to pay the premiums."
Ed asked, "So, what are dividends and excess interest?"
"Universal life insurance policies normally guarantee a minimum cash value of the policies, or some form of minimum interest payment. Depending on how old the policies may be, the minimum interest on some policies may be 3%, some times as high as 4% or 4.5%. Any interest that is credited to this policy over and above this guarantee is considered "excess" interest.
On whole life insurance policies, the profitability of the Mutual insurance companies, which include low mortality claims, may be paid to policyholders as dividends, as long as your policy is with a Mutual insurance company, an insurance company owned by policyholders.
Ed, if your policy was structured properly, the excess interest that pays your premiums, or the dividends that you use to pay the premiums, may be tax-free. By comparison, if you're receiving dividends from stocks or mutual funds, they are generally taxable."
Ed asked, "Are there any other strategies to reduce or eliminate life insurance policy premiums after retirement?"
Change to a Reduced Death Benefit
"Ed, there is the strategy of changing your policy to a reduced Death Benefit, on a guaranteed, paid-up basis. They normally call this the "Reduced, Paid-Up" option. If your excess interest from the life insurance policies or the dividends are not enough to pay a substantial part of the policy premiums, you could elect to reduce the life insurance Death Benefit, permanently, and change the policy to a "paid-up" status, thereby eliminating 100% of the premiums. If this option reduces your Death Benefit substantially, this may not be a strategy for you to implement.
Ed, these are the most common ways to eliminate or reduce life insurance policy premiums after retirement. There are also several other strategies available which are going to depend largely on other assets that you own in your portfolio, such as stocks and mutual funds. In other words, earnings from these types of accounts or investments may also be used to pay life insurance policy premiums, assuming you're not living on these earnings when you retire."
"Frank, this is exactly what i needed to hear. I'm now assured that the whole life insurance policies that I have really do have a place in my financial plan after I retire and I'm glad to hear that there are several strategies to reduce or eliminate the policy premiums. It makes me feel like I've just added several more pieces to my retirement puzzle. However, we really need to review what we just discussed at least every two years, so I don't forget the strategies. I'm realizing that the strategies we discussed for life insurance after retirement will allow an opportunity to provide a substantial increase in my retirement income. I don't want to lose these opportunities by focusing on the premiums, not the bigger picture."
"Ed, we'll do exactly that. Let's put this discussion on our future agendas."
*Guarantees are based on the claims-paying ability and financial strength of the issuing company. This hypothetical example is for illustrative purposes only.