Is Insurance a Dirty Word in Retirement?

As a wealth manager and financial planner, I’m always skeptical of articles espousing the benefits of life insurance and annuities. Don’t get me wrong. They have their place in financial planning, but I don’t subscribe to the philosophy that insurance solves every problem. So, when I learned that Ernst & Young, a highly respected accounting and consulting firm, completed a comprehensive analysis of the integration of insurance products in retirement planning, I was intrigued.

The EY report, entitled “Benefits of integrating insurance products into a retirement plan,” explores how two insurance products can be utilized to meet investors’ savings and protection needs: Permanent life insurance (PLI), and a deferred income annuity with increasing income potential (DIA with IIP), which represents deferred income annuities with persistency bonuses and non-guaranteed dividends.

The analysis considered five strategies:

• Investment only
• Term life plus investments
• Permanent life insurance (PLI) plus investments
• Deferred income annuity with increasing income potential (DIA with IIP) plus investments
• Permanent life insurance (PLI) plus deferred income annuity with increasing income potential (DIA with IIP) plus investments

To compare the five strategies, EY employed a commonly used test called a Monte Carlo Simulation to generate 1,000 different scenarios, each of which contained a timed series of interest rates, inflation rates, equity returns and bond returns. EY analyzed these different strategies looking for two specific outcomes most looked for by clients and financial professionals.

One strategy was the after-tax retirement income generated by a strategy that can be sustained with 90% probability of success. The second one involved discovering the legacy value left to heirs. This was calculated by adding the total of the face amount of any life insurance and investments after taxes, at the end of the time horizon.

In one scenario, the analysis found that permanent life insurance (PLI) plus investments outperformed an investment-only strategy and term life insurance plus investments strategies. The hypothetical couple, in the scenario, would realize a 20% gain compared to the investment only strategy when employing a PLI plus investments plan. Using a term life insurance plus investments strategy would result in a negative 2% change vs. an investment only strategy.

The conclusion was that PLI tended to “provide superior returns over fixed income in long-run scenarios”. This was due to the combined benefit of the guaranteed growth of cash value as well as dividends paid to policy holders. Not surprisingly, term life insurance premiums don’t boost long-term savings, instead acting as a drag on portfolio performance.

They also found that using PLI improves returns because it acts as a volatility buffer, providing investors with the opportunity to avoid selling investments in down markets and realizing losses in their portfolios. The EY analysis, examining scenarios with 35-, 45-, and 55-year-old couples, found similar results.

Overall, integrating PLI provides better income and a greater legacy benefit relative to investment-only and term life insurance plus investments strategies. The analysts at EY found that allocating up to 30% of annual savings to PLI and up to 30% of wealth at aged 55 to a Deferred Income Annuity (DIA) with an increasing income potential (IIP) may be appropriate for anyone looking to optimize retirement income and maximize legacy values. “Insurers are uniquely positioned to address these gaps with products that offer legacy protection, tax-deferred savings growth, and guaranteed income for life,” the EY report said.

My most valuable takeaway, among the many I had, was that integrating insurance into a well-planned retirement strategy may be more effective for investors, especially those with a higher risk appetite. While not directly stated in the EY report, those with higher incomes and greater tax liabilities may benefit from the tax deferral associated with PLI an DIAs with IIP. They also may be able to move these assets out of their estates more effectively in the future.

Integrating insurance products into your retirement plan can provide a variety of benefits, including legacy protection, tax-deferred savings growth, and guaranteed income for life. By taking advantage of these benefits and utilizing an integrated strategy for retirement savings, you may improve your chances of achieving financial security in retirement.

Neither MML Investors Services nor any of its subsidiaries, employees or agents are authorized to give legal or tax advice. Consult your own personal attorney, legal or tax counsel for advice on specific legal and tax matters.  CRN202602-4337236