When it comes to retirement planning, investing and insurance there is no shortage of financial (*cough*) “experts” who espouse the supposed sage advice of eschewing permanent life insurance vehicles such as Whole Life Insurance, Universal Life, or Indexed Universal Life in favor of Term Life Insurance.
They recommend taking the premium savings and investing the difference in the stock market. All one needs to do is scan the internet for quotes from the likes of Suze Orman, who is on record as stating that she “HATES WHOLE LIFE INSURANCE”, and that everyone should just buy Term Insurance.
Dave Ramsey, another financial soothsayer, is often heard preaching “Myth: Cash value life insurance, like Whole Life, will help me retire wealthy. Truth: Cash value life insurance is one of the worst financial products available.”
Even Mack Dudayev, CEO of Insurance Chance Inc. (a person therefor in the profession of selling Whole Life Insurance), has stated that “Some agents continue to be attached to the notion that Whole Life Insurance is a good product for the consumer. The truth is, for the huge majority of the population, Whole Life doesn’t make much sense.”
Now, are these financial overlords correct in their convictions that you should avoid permanent life insurance products like Whole Life Insurance, and that you would be better off over the long haul by just buying a cheaper “Term Policy” and investing the difference?
The answer, shockingly enough, will not come from the insurance industry executives or their professional agents. In fact it is not even going come from most financial professionals. The answer, believe or not, really comes from the federal government and lies within what it has been telling us about our health for years.
Here are four simple reasons why you should have permanent life insurance in your portfolio:
Reason 1 – Control your health costs
Believe it or not, no matter what these financial (*cough*) “experts” and other professionals tell you, what the President has been saying since 2011 is actually true:
You must have health coverage, or else you will face penalties, fines and possibly a loss of your Social Security benefit. This means that you must have Medicare.
But what’s the big deal? Medicare is just part of getting old – like watching golf on TV, or plucking earlobe hairs. We’ve known this since 1965. Well, Medicare just happens to not be free, and your income will also determine how much it will be. Meaning the more income you have, the higher your health costs will be.
But what can this cost?
For a 55 year old couple that plans on retiring at age 67 and living to age 85, in order to be fully insured (Medicare Part B, Part D and Plan F Medigap Plan), they can expect to incur roughly $524,493 in costs for just their premiums.
A little tidbit that the anti permanent life insurance crowd neglects to tell you is that health care costs are expected to inflate by 6.2% per year going forward. This data is straight from Fidelity Investments’ own “Planning for Health Care in Retirement” power point, which quotes the Centers of Medicare Services (CMS).
Here is the fun part: Medicare is “means-tested”.
Through Medicare’s Income Related Monthly Adjustment Amount (IRMAA) the government will look at how much income you are earning, which is practically everything in your financial plan and if it is too much you will have higher costs.
Suppose the hypothetical couple mentioned above happened to earn $1 too much by Medicare standards: they could then expect to pay $639,620 for the exact same coverage over the same period. That is a difference of $115,127.
There’s even more joy if this same couple earns the maximum income for Medicare means-testing purposes. They can expect to incur about $1.16 million for the exact same coverage.
Now why life insurance, specifically permanent policies? Well, the “cash value” within permanent life insurance policies (which can also be guaranteed in certain plans), just happens to not count as income by Medicare.
Thus, you will be able to tap a revenue source in retirement that won’t be used against you when your health is on the line.
But again, if you listen to the (*cough*) “experts”, you will believe that life insurance is awful. They are actually advising that you “invest” your dollars into investments that will be used against you when your health is on the line.
Reason 2 – Save your Social Security benefit
Believe or not, Social Security is not going broke and it most likely never will go broke, NO MATTER WHAT THESE FINANCIAL WIZARDS SAY.
In retirement, you will fund your health care directly through your Social Security benefit. Currently by law, the bulk of your health coverage costs (Medicare premiums) must come from your Social Security benefit.
Keep in mind that Medicare premiums inflate,historically, at a rate over 7.5% annually. All projections are stating that these premiums will continue to inflate by at least 5.8% for the next 8 years.
What you need to know: Social Security’s cost of living adjustments (COLAs) will only inflate by a maximum of 2.6% for the foreseeable future, according to the Social Security Board of Trustees.
Why Life Insurance?
- It generates a source of income that can will to supplement the loss of Social Security benefits.
- This income will not drive up health costs in the form of higher surcharges from Medicare.
Thus, you get to keep more of your Social Security benefit in retirement and have a more predictable cash flow.
Reason 3 – Lower your taxes…BY A LOT
You are being told to invest, most likely into “tax deferred” accounts like your company’s 401(k). This is great, because you will pay less tax today. Your employer may even chip in some extra dough on top of that.
However, every action has an equal and opposite reaction. It would seem that paying no tax now in exchange for having to pay tax later on in life would be a bad reaction.
The problem, once you reach the age of 70.5 you must withdraw assets from these Traditional 401(k)’s which will count as taxable income.
This taxable income will also count in terms of Medicare increasing your health coverage costs. Which will result in even less Social Security benefits.
By using a Life Insurance policy as an additional means of saving for retirement, there is a way to create another way to pay fewer taxes while being able to keep more of your Social Security benefit.
Remember, investing into a Traditional 401(k) will ultimately lead to:
- Fewer Social Security benefits.
- Higher health costs in retirement.
- More taxes paid at a higher income tax rate than when you were working.
Again, cash-building Life Insurance works. It can generate a revenue source that is tax free. The other advantage, Medicare will not being able to use it against you to drive up your health costs.
Reason 4 – Long-Term Care
By now, the following should be common knowledge, given the readily available data often cited in the popular press. According to the Department of Health Human Services, roughly 70% of Baby Boomers will need some form of LTC. While 25% of that 70% will need to stay in a facility for at least 3 years.
Also, an annual stay in a facility will cost about $78,000 in today’s dollars. After adding in the expected inflation rate of at least 6.2% for health care, how will most people afford this?
Yes, a a standalone LTC policy may be the best option. These policies tend to provide for the most benefits. The issue with these standalone policies is they tend to be expensive. While some do have premium increases through the term.
The Boston Globe wrote a piece a few years back on how certain LTC insurance carriers were increasing their rates on policy holders by as much 50% in order to keep up with their expenses.
The reason why Life Insurance is fantastic:
- Many policies provide the opportunity to purchase a rider that will supply LTC coverage
- Premiums never increase for life.
Life Insurance does have drawbacks though, and there is no such thing as a perfect solution or magic potion. These policies do have annual premiums and if a payment is not on time the policy could lapse.
But again, what other financial instrument can help you:
- Control and manage all of your health costs in retirement?
- Help manage your Social Security benefit?
- Possibly lower your taxes, by providing income that the IRS and Medicare doesn’t see?
- Provide Long-Term Care coverage?
As stated, these are just four simple reasons that not one financial expert is ever going to tell you…ever. Before taking the advice of the sages of the financial industry please realize that your health is on the line.
Believe or not it will mean more than you could ever expect. But, please just don’t tell the financial experts, it will ruin their sales pitch.