Liquidity When You Need It: At Death, Retirement or for Long-Term Care Expenses

Updated: Dec 9, 2019


Liquidity When You Need It - TRC Financial

Think about it - one policy that provides liquidity upon your death, liquidity to supplement retirement, and liquidity in case of a long-term care event.

As a leader in the life insurance industry and through our membership in M Financial, we have had the privilege of sharing with our carrier partners what clients need and turning those needs into products priced and built for the affluent. A common frustration for any successful individual is having to acquire a variety of insurance products to protect against different risks. We understand that frustration and have worked to design and deliver a single life insurance policy to help protect against three risks during three critical life stages. The importance of each of the 3 life stages depends on your financial profile. However, a critical feature of any financial plan is one that delivers good economics while providing flexibility as needs change throughout the years.

Life Stages

Life Stage 1 (Age 50 to 65)

You should start to think about transitioning some or all of your life insurance death benefit protection from term life insurance to permanent life insurance. The death benefit is the critical liquidity you are counting on to pay a tax-free lump sum to your heirs in the event of an early death.

Life Stage 2 (Age 65 to 80)

You are evaluating your liquid net worth to determine if you have sufficient assets to fund your retirement income needs. The underlying cash value in your permanent life insurance policy can be a critical asset to use if you need additional retirement income. You have the following options with your life insurance policy’s underlying cash value or potentially the death benefit:

  • Take tax-free policy withdrawals up to total premiums paid

  • Take tax-free policy loans without triggering tax on policy gains

  • Execute a tax-free 1035 exchange to a guaranteed or variable annuity to create consistent retirement income

  • Sell the policy to the secondary market for cash which is referred to as a life settlement

Life Stage 3 (Age 80+)

A long-term care medical event starts to become statistically meaningful. The reality of your individual circumstance is the probability is either 0% (you will never experience it) or 100% (you will have a long-term care medical event). We can structure the life insurance death benefit to provide substantial benefits in the event of a long-term care need. When available, our preference is to have an indemnity-based long-term care benefit. Unlike reimbursement definitions, you do not need to submit bills, receipts or any other type of monthly paperwork. You simply receive a check each month.

Client Profile: Male or Female Age 50+ with a Net Worth of $2M+

Risk Profile: You can fund premiums based on guarantees, fixed interest rates or variable investment options (i.e. allocate among available funds)

Sample Economics:

  • Male age 50 purchases a $1,000,000 death benefit and wanted to pay for the policy with a single premium.

  • He decided to fund the policy with guarantees as he was already taking financial risks in his business and was also heavily weighted to equities within his investment accounts.

  • He was most concerned about additional liquidity if he died before age 80 and then wanted to protect his liquid net worth if he had a long-term care financial need in the future.

A life insurance policy focused on delivering a death benefit and long-term care benefits if needed - it was funded based on guaranteed pricing:

Death Benefit = $1,000,000

Single Premium = $274,798

What are the economics if I die?

The internal rate of return (IRR) is 14% to 5% if you die before age 80 and stays above 2% on a guaranteed basis if you live to be age 100. IRR at life expectancy (Age 85) is 3.76% and 5.37% on a pre-tax equivalent basis assuming a 30% blended tax rate.

What are the economics if I need long-term care benefits?

Assuming you need long-term care at age 80 and remain on claim for 5 years, the internal rate of return (IRR) is 5.86%. This pays you $1,200,000 in total long-term care benefits ($240,000 per year for 5 years).

Is life insurance a good or bad investment?

The Economics – Is life insurance a good or bad investment?

When structured properly, life insurance will deliver good investment results under four liquidity options: when it pays in a death benefit, when it provides supplemental retirement income, when it delivers long-term care benefits or when it provides a lump sum cash payment upon sale of a life insurance policy.

We completed an analysis, using hypothetical ages and assumptions, to illustrate the economics of using life insurance to provide benefits for each of your life stages with one policy.

To start, we worked with clients to get answers to the following questions:

  1. How much death benefit is needed?

  2. How do you want to pay premiums? Single payment, over 10 years or over your lifetime?

  3. What underlying investment structure do you want for the policy? Guarantees, fixed interest rates or investment flexibility to allocate among various accounts – equities, fixed income, real estate and index funds.