Is Permanent Life Insurance Jeopardizing Your Retirement Plan? A Case Study.

I’m Blake May, a Partner at Meld Financial, and I’ve spent over a decade helping clients balance their estate planning and retirement needs. As a CERTIFIED FINANCIAL PLANNER® and Juris Doctorate, I have unique insights into the financial and legal aspects of this balance, and I work to help clients find the right solution for their families.

I recently met with a client who learned an expensive lesson – that “playing it safe” by purchasing a permanent life insurance policy can be the biggest risk of all. By sharing his missteps, and the changes I helped him implement, I hope to help you avoid a similar situation in your own financial plan.

This case study will cover the initial situation, the adjustments we helped the client make, the results, and how you can avoid a similar situation during your own retirement.

Rationale: Estate Planning Shouldn’t Overshadow Life Planning

Most Americans have a finite amount of money each month and must make the difficult choice between preparing for the best and the worst. This decision often comes down to retirement savings – which give you the funds for your best life after work – and life insurance – which helps your family financially survive the loss of you and your income.

The client in this case study was devoting most of his free cash flow to the worst-case scenario at the expense of the best-case scenario. This is, unfortunately, a common mistake in financial planning.

I was fortunate to work with the client and help him find balance between preparation for the rest of his life and preparation for his death. By sharing his story, I hope to help you:

• understand the balance between insurance and retirement planning.
• choose the type of life insurance that provides the most beneficial protection for your family.
• avoid insurance products that don’t serve your needs.

The Client: A Husband with Good Intentions

I was contacted by the client in this case study, who I will call John, for assistance with financial planning. John was in his early 60s at the time he contacted me, and he had worked for decades to build a nest egg, but he was still uneasy about his financial future.

His primary concern was for his wife. He wanted to ensure that she would be able to maintain her lifestyle and cover final expenses without financial strain if he were to pass away unexpectedly. At the same time, he wanted to give her a comfortable retirement.

To address these competing objectives, he had been saving dutifully for retirement and had purchased a life insurance policy 7 years prior to our meeting. This policy provided a permanent guarantee that his wife would receive the income she needed following his death, but it also hampered his ability to save for retirement.

The Problem: Expensive Premiums Consumed His Monthly Budget

John’s problem boiled down to balance. The $70,000 he had poured into the permanent life insurance policy over the last 7 years had only yielded $20,000 in accessible cash value. More importantly, his $850 monthly premium represented money that wasn’t going into his investment accounts during the critical “catch-up” phase of his career.

By prioritizing the worst-case scenario, John was inadvertently sabotaging the best-case scenario of a long, healthy retirement. If he lived into his 90s – or beyond – he would have devoted hundreds of thousands of dollars to life insurance and been forced to live on a much smaller retirement portfolio.

The Solution: Switching to a Term Policy Liberated His Budget

After a thorough review of John’s financial plan, I determined that he had better options than a life insurance policy that lasted until age 100. Instead, he could benefit more from a policy that protected his wife during the final years of his career and the early years of their retirement.

My suggestion was to surrender the permanent life insurance policy and reclaim the $20,000 in cash value he’d built. Then, I recommended that he secure a 10-year term policy with the same $1 million death benefit to provide the assurance he needed with a clear end date. This policy costs just $55 per month, based on his health and family history. Finally, I suggested that he redirect the monthly savings to retirement accounts with investments chosen to match his risk profile and goals.

I presented my findings to John, and he agreed that this was the right course of action for his family. With this change, he maintains the same level of protection for his wife over the next decade while reducing his monthly spending by over 90%.

The Outcome: Affordable Premiums Allowed Maximized Retirement Savings

The simple change from a permanent to a term insurance policy was transformative for John’s financial freedom. He took the $795 per month – the difference between the premiums for the two products – and invested it in a diversified portfolio which was tailored to his specific goals and tolerance for risk. In turn, he was able to save thousands more for his retirement.

Over time, the additional money he added to retirement accounts should benefit from compounding returns and continue to grow. In fact, a simple calculation using a steady 8% rate of return shows that the extra money he invested will grow to nearly $200,000 over the ten years of his insurance policy term. Then, if John lives to age 100, the value of his portfolio would exceed $2.8 million using the same 8% annual return.

This strategy does have trade-offs, which John accepted. The risk comes if he dies between the end of his term policy and the point at which his investments would have exceeded the $1m life insurance payout. Using the simplified example of an 8% annual return, that break-even point is around age 87.

However, John’s primary focus was not leaving money to his heirs. It was ensuring his wife was protected during the final years of his career and then building a good life for them in retirement. As the chart below shows, the switch from a permanent to a term life insurance policy is designed to help him achieve those goals.

The following graph shows the hypothetical value created by investing the proceeds from his permanent life insurance policy and the savings from the premium each month from age 62 to age 100. It shows the cash value of the life insurance policy being invested immediately, and the “saved” premiums of $795 being invested each month.

Today, John is on a clear path to retirement success. His portfolio is designed to continue growing until he reaches retirement, then generate income to fund his lifestyle. He also has peace of mind knowing that his wife is protected by a $1 million policy over the next decade. The changes I helped him make allowed him to switch from “renting” financial security from an insurance company to owning his investments.

Are Your Premiums Jeopardizing Retirement Success? Review Your Coverage Today.

At Meld Financial, we can help you determine if you have the appropriate balance between retirement and estate planning needs. Our advisors take a holistic approach to financial planning that helps you prepare for the most common threats to your financial success.

Over the past four decades helping clients achieve their financial goals, we developed a comprehensive wealth management program called Financial Fingerprint®. This nimble plan brings together the most important aspects of your financial life into one easy-to-understand plan that adapts to your changing circumstances.

Use the form below to request a meeting to discuss your personal financial situation and get started with Financial Fingerprint®.

This case study is for illustrative and educational purposes only. Names and certain details have been changed to protect client privacy. This example does not guarantee similar results, nor should it be considered a recommendation, prediction, or individualized advice. Each client’s situation is unique and outcomes may vary.