Several years of heightened inflation and market volatility have proven challenging for retirees and workers; uncertainty makes planning difficult. Many people are seeking ways to safeguard their assets against inflation and ensure financial security during retirement.
While most investors know to diversify their portfolios to hedge against market risks, many don’t consider life insurance as a method to enhance their long-term financial plan.
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We spoke with Jason Handal, Vice President of Risk Products at Northwestern Mutual, to unpack the nuances of life insurance policies and why they are essential to a healthy financial plan.
Handal highlights that a long-term financial strategy with consistent dividends is paramount to a comfortable retirement and dives into why life insurance plans are often overlooked when creating a financial plan and retirement strategy.
How life insurance and annuities can enhance a financial plan
Life insurance and annuities are often great products to strengthen a comprehensive financial plan, yet they are frequently disregarded. The complexity and ambiguity around how the products work stops many workers from taking advantage of them.
Handal notes that many Americans overestimate the cost of insurance, likely because they're unaware of the crucial benefit of accumulated cash value and how policies fit into their plan.
He breaks down the basic components of life insurance and how it can be utilized during every season of life.
“I think whole life insurance is so much more valuable than people realize because of its multiple uses,” he said. “In those early years, it's the death benefit — protection for the family, debt, whatever the needs are — and protecting your insurability.”
“It starts to build a cash reserve in your thirties and forties, growing and creating flexibility. The cash value is guaranteed to grow over time. It does not decline from one year to the next, regardless of interest rates, market conditions, the economic climate, or the tax environment. So when you compare those attributes to other safer assets, that savings component of your whole life is less volatile.”
“Now, it could be collateral for a loan,” he continued. “It becomes a more robust cash reserve that lets you take more market risk inside your 401(k). You can allocate more to equities because you've got this growing nest egg of cash value. As you enter your fifties and sixties, you start to see it has built some value.”
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“This is now a central part of my retirement planning,” Handal explained. “If I want to purchase a guaranteed income annuity, if I want to take more equity risk, if it's a down market, and I don't want to pull money out of my equities or my investments, I'm going to use some of my cash value. I don't want to pull money out when the market's down. So it stays with you and grows over that long period of time, providing multiple benefits across those different life stages.”
Whole life insurance is the foundation of a holistic and healthy financial plan, which will ultimately lead to better outcomes in the long term. The cash reserve from the policy can be used when revisiting your budget, building an emergency fund, helping aid debt management, or even funding your child’s education.
Handal notes that life insurance has multiple uses and should be considered a life-stage asset. However, it differs from investments in a few crucial elements, particularly the accumulated cash value builds regardless of interest rates, market volatility, or tax policy.
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Annuities, on the other hand, offer different benefits.
Handal explained, “Think of annuities serving two really important purposes. Number one is supplement retirement savings through 401(k) plans, variable and accumulation annuities, traditional investments, or life insurance.”
“The second purpose of annuities is that it provides guaranteed income in retirement,” He said. “Over decades, you've seen the trend of moving away from defined benefit plans in the workplace to shift to putting the burden on us as the employees through defined contribution plans. Incorporating an annuity into our planning provides that floor of guaranteed income, which creates great peace of mind.”
However, while all annuities are tax deferred, some are riskier than others. It’s important to assess risk appetite, timeline, and financial goals when considering which type of annuity best suits your financial plan.
Financial planning and retirement guidance for every stage of life
Handal highlights the importance of creating a sound financial plan with a long-term focus despite current economic factors.
“So whether you're worried about inflation or a recession, it's essential to stay disciplined in your plan,” he said. “One of the things we try to focus on through our planning process is planning for and addressing uncertainty. That includes protection and flexibility and doing it in a way that has long-term benefits that will help you feel confident that you'll get the outcomes you want.”
“We encourage our clients to avoid making emotional financial decisions that are not done with an eye towards the long term,” Handal explained.
In this sense, Handal suggests that consumers view whole life insurance as a non-correlated asset in their financial plan, allowing them to take more risk with their investment portfolio. Over time, it will lead to better retirement savings, better retirement income, and better legacy values for their families.
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He also highlights the importance of evaluating your financial plan early on. Although younger workers don’t typically think about life insurance, as they tend to associate the death benefit aspect with the product, he explains why buying life insurance plans earlier is advantageous.
“There's no question it’s better to purchase a life insurance policy at a younger age,” He said. “It's less expensive when you're younger, as your likelihood of dying is much lower. Secondly, the savings component and compound interest create meaningful long-term value. The sooner you start, the better off you will be.”
“It's no different when it comes to whole life insurance, and when you're young and starting a family, starting a business, or buying a home, you have that need to save,” he explained. "It protects your insurability.”
Handal shares a few tips for crafting a long-term financial plan and how to stick through it through every decade of your working years through retirement.
Twenties: In your twenties, it's all about starting to save, however much that may be. First, start saving — no amount is too small. It's the discipline and the mindset. Second, consider protecting your risks because when you come out of school, college, or graduate school and start working, for most of us, your only real asset is your ability to earn an income. So broadly speaking, most of these young people will be healthy—so disability coverage and initial life insurance coverage are really important parts of the foundation. You don't realize that you're building a financial plan, but those are the building blocks.
Thirties & Forties: As you get into your thirties and forties, ideally, your income starts to increase. Maybe there’s a need for more than just the term insurance. Now, you can start converting some of that term insurance or purchasing whole life insurance and strengthening your plan. You're also contributing to a 401k at this point. You're considering whether you have enough protection in place because now you might have a family, a mortgage, a spouse, and some of the things we think of in our thirties.
Fifties: When you start to hit your fifties, it becomes more about looking ahead to retirement and asking yourself key questions. 'When do I want to retire? Am I on track? If I'm not on track, why is that? What will it take to get there?' Different solutions, like annuities, IRAs, and others, come into play depending on your stage in life.
Retirement: When you're in retirement, it's all about where your income comes from and how you manage your risks — primarily longevity and long-term care risks.
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