Best Insurance Policy For Retirement – At first glance, permanent life insurance policies and annuity contracts appear to have diametrically opposed objectives. Life insurance attempts to provide a one-time financial payout to an individual’s family upon death, while an annuity acts as a safety net by providing an individual with a guaranteed stream of income for life. These two products are often marketed as tax-deferred alternatives to traditional stock and bond investments. Each of them has high expenses and can reduce the return on investment.
Life insurance provides financial security for your dependents upon your death. There are several types of strategies:
Best Insurance Policy For Retirement
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Sometimes called cash value policies, these products add a savings component. For this reason, premiums are often much higher than those associated with corresponding term policies.
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For whole life policies, the life insurance company credits the policyholder’s cash account based on the performance of a relatively conservative investment portfolio.
These life insurance products allow policyholders to choose from a basket of stocks, bonds and money market funds to invest in, thereby increasing the growth potential of the policy. However, variable life policies can also increase risk if the underlying investment underperforms.
Funds in the policy cash/investment account grow on a tax-deferred basis. Unlike regular investment or savings accounts, consumers are not taxed on investment gains until they actually withdraw their funds. These policies also provide spending flexibility. For example, if your cash balance is high enough, you can take out a tax-free loan to cover unexpected needs. The full death benefit will remain in place as long as you repay the account the amount borrowed, plus any accrued interest.
It’s important to know that there are downsides to using life insurance as an investment strategy, including high fees. About half of policyholder premiums go to sales representatives’ commissions. So it will take a while for the saving part of policy to start gaining traction.
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In addition to the upfront costs, policyholders must pay annual administrative and management fees, which can offset the benefits of tax-sheltered growth in the fund. Also, it’s often not clear what the fees are, making it difficult to compare providers. Sadly, many people let their policy lapse within the first few years because they can’t maintain the steep payment schedule.
Many fee-based financial planners urge investors to purchase a lower-cost term insurance policy and then invest the remainder of the money that would have been used to pay permanent life premiums into tax-advantaged retirement plans such as 401(k)s or IRAs. This approach allows policyholders to pay less in investment fees while still enjoying tax-deferred growth in the account.
Of course, for individuals who are already maximizing their contributions to these tax-advantaged retirement accounts, a cash value policy may be prudent — especially if they choose a provider with low fees and have the time to make their cash Balance growth. Additionally, high net worth individuals sometimes place cash value policies in irrevocable life insurance trusts to minimize federal estate taxes (up to 40%) on their beneficiaries.
Many people worry that they won’t have enough nest egg to see them through retirement. Annuities were developed to help alleviate these concerns. An annuity is essentially a contract with an insurance company in which individuals agree to pay the company a certain amount in one lump sum or in installments, which entitles them to receive a series of payments at a future date. These payments typically last for a specific time span — say 10 years. Other annuities offer lifetime payments. In either case, policyholders know they will have a financial cushion.
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The number of annuity products has exploded over the years. This applies to fixed contracts that credit your account with a guaranteed rate, as well as variable contracts whose returns are linked to a basket of stocks and bond funds. There are even indexed annuities whose performance is tied to a specific benchmark, such as the S&P 500.
Unfortunately, like permanent life insurance policies, annuity products also require significant upfront commissions, which can eat into long-term returns. They also have a high surrender charge, which is basically a penalty an investor has to pay for withdrawing money from an annuity contract too early or canceling it entirely. For this reason, annuity funds may be tied up for as long as ten years. It’s not uncommon for policyholders to get hit with distributions in the first few years of their contracts.
Tax treatment is also an issue. While income growth is done on a tax-deferred basis, any investment gains are subject to ordinary capital gains tax if the policyholder withdraws funds before age 59½.
For all of these reasons, annuities make the most sense for those with the longest life in the family. A lifetime source of income is critical for people who may live into their 90s, especially if their 401(k) withdrawals and Social Security payments fall short.
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For younger investors, variable annuities are only prudent if they’ve exhausted their 401(k) and IRA contributions and are looking for tax shelter.
The above-mentioned annuities are in the unqualified category. Qualified annuity contracts are those held in an IRA or other tax-advantaged retirement plan such as 401(k)s. Qualified annuities are funded with pre-tax dollars and nonqualified annuities are funded with after-tax dollars.
Qualified annuity contracts are subject to the same early exit penalties and required minimum distribution (RMD) rules as other investments in a qualified retirement plan.
On March 27, 2020, former President Donald Trump signed a $2 trillion coronavirus emergency stimulus package, known as the CARES (Coronavirus Aid, Relief, and Economic Security) Act, into law. The CARES Act waives the 10% tax penalty for early withdrawals from retirement funds, including qualified annuities, if the withdrawals are related to the financial impact of the coronavirus. The exemption is retroactive to January 1, 2020. You also don’t need to make RMD contributions from your retirement accounts in 2020.
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Many full-time employees have access to health insurance through employer-sponsored health insurance plans. Typically, employees keep this plan until they quit their job or retire. It’s good that some employers look after their ex-employees, but with costs rising, that may not always be the case.
Health insurance costs discourage employers from offering plans for their retirees, an unfortunate reality in today’s volatile market. They may feel that they would rather provide coverage to active employees, and doing so would cancel the coverage when the worker retires.
All these costs add up. If you were to pay for these services out of pocket, you would quickly deplete your retirement funds. The best way to prevent this from happening is to purchase a health insurance plan that meets your needs.
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All provinces in Canada provide their residents with health insurance with a basic set of products and services. This coverage extends to older adults, but to a small extent. Thankfully, the most expensive things, like doctors and hospitals, are covered by the provinces.
In Ontario, OHIP will only pay for certain services, which they detail on their website, and there are very few of them.
What about the rest? While seniors do have some drug coverage, it’s only a small percentage. Even with the extra money for seniors, it’s not enough to pay for all the medical care you might need.
If you had an employer-sponsored plan before, take the time to evaluate the coverage your provincial plan offers and consider whether you need more. (Odds are, you will!)
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Thankfully, there are plenty of plans to choose from. You might find a plan that not only covers what your provincial plan doesn’t, but might even be better than what you enjoyed as a full-time employee. Many plans have deadlines for enrolling in coverage, so it’s important to act fast.
But don’t forget that coverage varies from plan to plan. Costs depend on the level of insurance you choose and your age. Some plans are basic and cover only what you need, while others are more detailed and cover much more than that.
Finding the perfect plan might sound overwhelming, but it’s not. Contact a customer service representative at and we’ll be more than happy to help you choose a plan that meets your needs and fits within your budget. We can answer any questions you may have.
Getting older comes with challenges, but buying health insurance doesn’t have to be one of them. Contact us today and we can help you get started!
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