by Rich Wesselt, founder and principal, Wesselt Capital Group
I am a strong proponent of a three-part model for financial planning and retirement planning: Savings, protection and growth. I have written often about the importance of a strong savings habit, and I have explained the benefits of a whole life insurance policy before.
I like to think of it in terms of athletics. Football games can get sophisticated, with complex plays and instant replay for challenges. Yet none of that matters if a team has not mastered the fundamentals. Players still have to block and still have to tackle. In football and finance, we need to make sure our fundamentals are clear.
Our savings habits and our protection habits are two key fundamentals that are the base of a pyramid of success that are seemingly lacking. Too often these days, more time is being spent on investments than on savings and insurance. Investments are best supported by a sound savings and protection plan.
Putting your money to work for you — that is, giving it a chance to grow and accrue — is critical to creating a financial future that serves you and your family. In fact, you can combine protection and growth with a whole life insurance policy used as an investment vehicle. It can be combined with individual investment portfolios and income annuities to earn value over your life.
“Buy term and invest the difference” is the most frequent version of such retirement strategies employed today, which I addressed in an earlier post discussing “Integrating Whole Life Insurance into a Retirement Income Plan” by Wade Pfau and Michael Finke of the American College. In addition to discussing the pros and cons of a plan involving term life insurance, Pfau and Finke also discussed four integrated, whole life insurance scenarios, described below.
The protection component is essential to these investment plans — let’s review them:
1. Covered assets strategy
The covered assets strategy is based on an income annuity. An income annuity is essentially a contract between the purchasing party and their insurer. The benefit is that it guarantees income in the long-term, allowing for an ensured, steady form of cash flow that is without risk, unlike other assets. Depending on the type of annuity, it can either be paid off in installments or as a lump sum. This example uses a single life annuity, meaning that only one person will be paid the money from the annuity and upon their death, the contract will end. The annuity is combined with withdrawals from other assets to serve as income.
2. Pure volatility buffer
The second strategy, the pure volatility buffer, works without an income annuity, instead focusing on the cash value of the whole life insurance policy. The cash value is part of the money allocated after each premium payment. As time passes, the sum of money in a whole life insurance policy continuously increases and can be used by the policyholder. During economic struggles, the policyholder spends from their cash value, so they avoid taking a loss on their other investments. Once the market has stabilized, they return to utilizing their investments.
3. Covered assets + limited volatility buffer
The next strategy is a combination of the covered assets scenario and pure volatility buffer. It combines the single life annuity plan from the covered assets strategy with a partial volatility buffer. The difference between this buffer and the pure volatility buffer is that the partial buffer has a fixed limit on spending. The policyholder can only draw from their cash value up to the value of their cost basis, which is the total value of their insurance payments. This provides a safer alternative to the second strategy, due to the consistency of the annuity and the hard limit on spending.
4. Covered assets + full volatility buffer
The final option is a combination of pure volatility and covered assets. As in scenario two, the entire cash value is used as a buffer to help with investments. It’s supplemented by an income annuity this time, though, up to the value of the death benefit. This results in a portfolio with a high upside from the buffer investment strategy and a safe floor due to the income from the annuity.
If you’re wondering what all of this means for you, take a step in the right direction by calling a financial planning professional to discuss your retirement planning needs. A plan like this is an important step towards providing financial security and wellbeing for your family for a lifetime.
About Richard Wesselt, Principal and Founder of Wesselt Capital Group
With over 23 years of dedication to the financial services industry, Richard Wesselt brings a wealth of knowledge and experience in helping clients plan for a secure future with financial and investment planning. As principal of the Wesselt Capital Group, Rich uses a relationship driven, individual-based approach to macro economic planning. Rich has a bachelor’s degree in Economics from the Wharton School and is a member of Top of the Table. He holds his FINRA Series 6 Registration. Follow him on Twitter @RichWesselt.