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.
Objective/suitability
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.