The Role of Whole Life Insurance in Retirement Planning
Clients often assume that their need for life insurance ends when they stop working. In fact, whole life insurance can play an important role in your client's retirement income strategy. For higher income earners, a whole life policy may also be an effective way to help protect income and accumulate additional funds for retirement.
Neil Drzewiecki is the head of life products for MassMutual Life Insurance Company. He is responsible for life insurance product development and implementation of new products for both its career agency and third-party distribution channels. His 29 years of experience also includes being the risk officer for the retirement-services business line, leading various strategic projects in MassMutual's US. insurance business, as well as a variety of roles in both the institutional and workplace lines of business.
I spoke with Neil in mid-September. You can listen to this interview as a podcast here.
Tell me a little bit more about your background and the responsibilities that you have in your role as head of life products.
I am an actuary and I've spent 27 of my almost 30-year career here at MassMutual in a variety of roles in our life and other areas of the company. In my current role as head of life products, we monitor the life market. We watch what our competitors are doing. We brainstorm new ideas. My team manages the entire product development cycle for all of our life products that we distribute through our advisors and business partners. We decide what new products or changes to existing products we'll work on. We manage the process from ideation to development, from pricing to implementation. Our goal is to have a competitive, diversified product portfolio with whole life as our core product.
What are some of the key product features that participating whole life offers?
Whole life continues to thrive in the life insurance market for a couple reasons. Whole life offers substantial guarantees that include a death benefit and cash values based on the payment of your premiums. The guarantees are an important feature when comparing whole life to other types of permanent life insurance products.
Secondly, as a mutual life insurance company, MassMutual does not have shareholders. Instead, the company operates for the benefit of its participating policy owners. Participating whole life policy owners are eligible to receive a dividend each year as part of their policy. While dividends are not guaranteed, MassMutual has paid dividends to eligible participating policy owners every year since 1869.
That combination of strong overall guarantees and a solid track record provides long-term, total value to policy holders. It sets whole life insurance apart from other types of permanent life insurance and many other financial products as well.
That's an impressive 150-year-plus track record. What financial risks can life insurance help clients manage?
People generally buy life insurance to help protect the financial security of their family or business. Having enough life insurance to protect the value of a provider should be a foundational part of any sound financial plan. However, permanent cash-value life insurance, like whole life, can help people address other financial risks. The cash value available may be used for emergencies. It can be used to supplement retirement income and manage certain risks during retirement. Overall, a product like whole life offers some very attractive planning opportunities that some advisors may not be fully familiar with.
How does it fit in? What is the role of a participating whole life policy in a client's overall financial strategy?
Most people buy life insurance while they're working to help support their family. It also provides the protection that they need. They might also realize that it can help them meet these other financial goals later in life. Whole life insurance offers a combination of features and benefits that includes permanent life insurance protection, cash value accumulation, guarantees and a valuable income tax advantage. It's more than just life insurance product; it's a versatile financial asset that can help clients address different financial needs over the course of their lifetimes. For example, the available cash value can help the client with college expenses or even provide startup money for a business opportunity.
How can whole life help people be better prepared for retirement?
People often assume that their need for life insurance ends when they stop working. In fact, whole life can play an important role in your client's retirement income strategy. For example, life insurance protection can provide additional financial security for both your client and his or her spouse during retirement. Having a paid-up policy that will provide a guaranteed income-tax-free death benefit to a surviving spouse may allow your client to spend their other retirement assets more freely. This may allow both of them to enjoy a more secure and comfortable retirement.
For higher income earners, a whole life policy may also be an effective way to protect income and accumulated funds for a retirement. It provides the life insurance they need while they're working and saving for retirement. It also offers a systematic and disciplined approach to accumulating additional funds for retirement, stable and consistent tax-efficient growth of cash values, and the option to take advantage of distributions during retirement.
Whole life could also help clients manage the market risk during retirement. If your clients take withdrawals from their retirement accounts, say during a market downturn, it may significantly reduce their value over the long term. That's why it's important to have alternate sources of retirement income that are not directly impacted by market conditions. A whole life policy can add a conservative element to an overall accumulation strategy. In addition to the death benefit protection it provides, it builds that cash value over time, increasing each year, and never declines in value due to market conditions. It can help clients be better prepared for when there's market downturns during their retirement.
If you consider the recession of 2007-2009, MassMutual whole life policy owners may have seen the value of their homes, retirement accounts, and other investments decline in value. However, when they received their annual policy statements, they found that their cash value increased each year during that timeframe. If they needed funds at that time, they had the option to take a policy loan.
Can whole life insurance help people plan for their healthcare needs in retirement?
A whole life policy can be an effective end-of-retirement planning tool. Policy owners may choose to take distributions of the cash value to help pay medical bills or long-term care expenses later retirement. Some of today's whole life policies offer chronic illness and qualified long-term care riders. These allow policy owners to accelerate a portion of their policy death benefit, income-tax free, to pay certain healthcare expenses that might not be covered by other insurance if they meet the qualifying criteria.
MassMutual also offers a portfolio of hybrid whole life or what we call “long-term care” policies, which are hybrid whole life long-term care policies that are specifically designed for long-term care planning.
One of the concerns I often hear is whether whole life is less flexible than other types of life insurance products. Is that accurate?
We hear that occasionally. But because whole life has fixed premiums and guaranteed values, some people think it lacks that flexibility. But today's whole life products offer riders and features that can help you tailor a policy to meet your clients' needs. These include term-to-perm riders and a line to reduce the premiums to fit the client's budget and coverage needs. MassMutual also offers additional life insurance riders that allow for the payment of additional premiums to purchase paid-up additions of a death benefit, increasing both the policy's death benefit and cash value. Clients can choose a policy to be paid up at or before retirement, or they can elect to have their policy paid up with a reduced death benefit. That is what we call our “reduced paid-up” option; at any time there is sufficient cash value, no additional premiums will be due.
Overall, MassMutual's whole life product portfolio offers a wider range of product options than ever before. Some products are more protection-oriented with lower premiums; others have higher premiums, limited premium payment periods, and offer greater accumulation potential.
If there's one key takeaway that you would like to leave with our readers about how they should analyze whole life policies and how they should position them to clients, what would that be?
Whole life is more flexible than people realize. It provides a death-benefit coverage during periods where you need income replacement. It has cash value growth that can be used for a variety of needs. We talked about college planning and retirement planning. Some policies even offer other living benefits, where you can use your death benefit to cover things like long-term care and possible medical expenses.
Whole life can be a more flexible, versatile tool in your financial planning toolkit than people may realize.
The decision to purchase life insurance should be based on long-term financial goals and the need for a death benefit. Life insurance is not an appropriate vehicle for short-term savings or short-term investment strategies. While the policy allows for loans, you should know that there may be little to no cash value available for loans in the policy’s early years.
The information provided is not written or intended as specific tax or legal advice. MassMutual®, its subsidiaries, employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
*Distributions under the policy (including cash dividends and partial/full surrenders) are not subject to taxation up to the amount paid into the policy (cost basis). If the policy is a Modified Endowment Contract, policy loans and/or distributions are taxable to the extent of gain and are subject to a 10% tax penalty if the policyowner is under age 59½. Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.
The products and/or certain features may not be available in all states. State variations will apply. Whole Life Legacy series policies ((Policy Forms: MMWL-2018 and ICC18-MMWL in certain states, including North Carolina)/ (MMWLA-2018 and ICC18-MMWLA in certain states, including North Carolina)) and MassMutual Whole Life series policies on the digital platform (Policy Forms: WL-2018 and ICC18WL in certain states, including North Carolina) are level-premium, participating, permanent life insurance policies issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001.
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