We have seen situations where people work for donkey years, yet they have nothing to show for it after their retirement. They go back from grace to grass. Observations have shown that these people could not make good plans during their active years of work. They force their dependents including their children into an almost unending period of poverty. In order to avoid such ugly situation, the life insurance retirement plan is the rightful answer to it. It is often described as the Life Insurance Asset Accumulation Plans. If you plan well, you will live well.
Factors that are sequel to the retirement plan
Several factors are responsible for the increasing popularity of the insurance retirement plan. However, only very few will be highlighted:
- Many people have become very conscious of saving for their retirement as the social security’s future tends to be less certain.
- People’s confidence in the company’s retirement program has been shattered owing to corporate downsizing and tax law changes.
- On the average, income tax free has brought cash value life insurance to lime light. It is generally recognized by all and sundry.
The life insurance retirement plan provides the investor an additional retirement income through a term life insurance policy (reference: http://lifeinsurancequotes-online.org). The policy features a life insurance death benefit; tax deferred accumulation and market appreciation. Over funding an insurance policy is the best for an investor who is already taking good advantage of tax merited ways to save for retirement.
Some of the features of the life insurance retirement plan are highlighted below:
- It must be insurable.
- It often has a surrender charge in the initial 10 to 15 years.
- All loans must be taxable immediately.
- Contribution must be made for at the least, 10 years.
- The death benefits that will be paid to the beneficiaries are automatically tax free.
The limitations of the life insurance retirement plan are highlighted below:
- One limitation worth mentioning is that the retirement plan policy may be incorrectly overfunded. In this case, the policy will be classified as a Modified Endowment Contract (MEC). The mistake may never be corrected because once it is a Modified Endowment Contract (MEC); it will continue to be a Modified Endowment Contract (MEC). The overall result of this mistake is that the policy loan will now be taxable. This will of course erode all the retirement plan benefits.
- Another grievous risk of using a life insurance policy that is over funded as retirement savings is the fact that the policy may lapse with high outstanding loan.
As a result of these limitations imposed on the policy, so many criticisms have arisen. Some are of the opinion that tax deferral opportunities should first be exhausted. Then it may now make a lot of sense to jump into cash value life insurance policy. The cash value will build up in a tax deferral basis. If you later observe that the life insurance will not be needed, then you may fall back on the cash value. This will provide multiple sources of income for the retirement period.