Using Life Insurance for Retirement Funding: A Guide for Financial Professionals

As a financial professional, you understand the unique challenges business owners face when planning for retirement. Traditional retirement tools like 401(k)s and Social Security often fall short for high-income earners, leaving a gap between the retirement funds needed and those available. This is where life insurance within a qualified retirement plan may be a game-changer for your business owner clients.

Flexibility and choice

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Why should financial professionals consider this strategy?

Tax advantages: Life insurance within a qualified retirement plan, such as a 412(e)(3) plan, allows business owners to make tax-deductible contributions. These contributions can be used to purchase life insurance and fixed annuities, which grow tax-deferred until retirement. This reduces taxable income today while funding future retirement needs.

Enhanced retirement savings: By leveraging life insurance, business owners can save more for retirement. The cash value of the life insurance policy grows tax-deferred, providing a boost to retirement savings without additional out-of-pocket expenses.

Flexibility and options: Upon reaching retirement age, business owners have several options for handling the life insurance policy:

• Surrender the policy: Roll the proceeds into an IRA, providing additional retirement funds and flexibility to cover expenses.
• Distribute the policy: Become the owner of the policy, maintaining coverage and ensuring financial protection for the family, especially valuable if the client is no longer insurable.

Financial protection: If the business owner passes away before retirement, the life insurance policy guarantees that the retirement benefits are available for their family, ensuring financial security even in their absence.

How does it work?

A 412(e)(3) plan, also known as a fully insured defined benefit plan, is funded exclusively by insurance products, such as annuities and life insurance. Here’s how it works with life insurance:

Funding: The plan is funded through the purchase of life insurance policies and annuities. These insurance products guarantee the benefits promised by the plan, provided that the premiums are paid as required.

Premium payments: The plan requires level annual premium payments, which must be paid until the participant reaches retirement age.

Guaranteed benefits: The benefits provided by the plan are guaranteed by the insurance carrier. This means that as long as the premiums are paid, the benefits are secure and not subject to market fluctuations.

Tax advantages: Premiums paid for the life insurance policies within the plan are tax-deductible for the employer. Additionally, the cash value and death benefits of the life insurance policies can grow tax deferred.

No loans: Participants cannot take loans against the life insurance policies within a 412(e)(3) plan.

This type of plan is particularly beneficial for small business owners looking for a secure retirement plan with guaranteed benefits and tax advantages.

Reasons to present this strategy to business owner clients

Closing the retirement gap: This strategy helps business owners bridge the gap between what traditional retirement tools provide and what they need for a comfortable retirement.

Tax efficiency: The tax-deductible contributions and tax-deferred growth offer significant tax advantages, making it an attractive option for high-income earners.

Comprehensive financial planning: Incorporating life insurance into a retirement plan adds a layer of financial protection, ensuring that the client’s family is taken care of in case of premature death.

Flexibility and control: The various options available at retirement provide business owners with the flexibility to choose the best course of action for their unique situation.

By presenting this strategy to your business owner clients, you can help them achieve a more secure and flexible retirement plan, leveraging the benefits of life insurance to enhance their overall financial well-being. Share this article Using Life Insurance for Retirement Funding with your clients to get the conversation started.

Give us a call at 800-255-9678, option 3 if you’d like to learn more about how life insurance can fit into a client’s financial strategy.

Representatives of Ameritas do not provide tax or legal advice. Please refer clients to their tax advisor or attorney regarding their specific situation.

Products and riders may not be available in all states or in all distribution channels. Optional provisions and riders may have limitations, restrictions and additional charges.

All guarantees are based upon the claims-paying ability of the issuing company and do not apply to the investment performance or account value of the underlying variable portfolios. Policy features may vary and may not be available in all states.

Variable products are issued by Ameritas Life Insurance Corp. and underwritten by its affiliate Ameritas Investment Company, LLC. They are subject to investment risk, including loss of principal.

Variable products are suitable for long-term investing and are subject to investment risk, including possible loss of principal. Before investing, carefully consider the investment objectives, risks, charges and expenses and other important information about the policy issuer and underlying investment options. This information can be found in the policy and investment option prospectuses, which are available by calling 800-255-9678 or online at ameritas.com/prospectuses. Please read the prospectuses carefully before investing or sending money. Products are not available in NY.