Enhancing Retirement Benefits: Innovative Approaches for Life Insurers

Insurance provides vital protection, enhancing retirement benefits and ensuring that your loved ones won’t suffer severe financial strain in the event of an unexpected loss of income, disability, or death.

“However, insurance serves more than just protecting dependents in unforeseen circumstances,” advises  Joseph Aspelund, Director of Insurance Sales & Asst. Branch Manager at David Lerner Associates, Inc.

“It can also play a vital role in enhancing retirement benefits.”

Current State of American Life Insurance & Retirement Industry

The US life insurance and retirement industry faces significant challenges but offers substantial growth opportunities.

According to a 2022 Ernst & Young analysis, by 2030, there will be a $240 trillion retirement savings gap and a $160 trillion protection gap.

Life insurers are uniquely positioned to bridge these gaps with products offering legacy protection, tax-deferred savings growth, and guaranteed lifetime income.

Exploring Retirement Benefits

EY’s analysis suggests that integrating permanent life insurance (PLI) and deferred income annuities with increasing income potential (DIA with IIP) into retirement plans can offer value beyond investment-only strategies.

To evaluate this, EY analyzed five strategies across different starting ages using Monte Carlo simulations:

1. Investment-Only Strategy: In this approach, the investor utilizes a combination of equity and fixed-income assets, following Morningstar’s moderate glide path asset allocation strategy with annual rebalancing. Savings are initially directed assets up to the IRS contribution limit, with any excess directed to a taxable account.
2. Term Life Insurance + Investments: With this strategy, a portion of the investor’s assets is allocated towards PLI premiums, specifically whole life insurance paid up at age 65, with the remaining allocated to investments. Dividends are assumed to purchase paid-up additions (PUAs), and a representative PLI product from the industry is used for analysis.
3. Permanent Life Insurance (PLI) + Investments: With this strategy, a portion of the investor’s assets is allocated towards PLI premiums, specifically whole life insurance paid up at age 65, with the remaining allocated to investments. Dividends are assumed to purchase paid-up additions (PUAs), and a representative PLI product from the industry is used for analysis.
4. Deferred Income Annuity with Increasing Income Potential (DIA with IIP) + Investments: This approach involves allocating a portion of the investor’s assets to acquire a DIA with IIP, with the remaining portion directed towards investments. A product representing DIA with IIP products is used, with the increasing income potential feature modeled as dividends.
5. PLI + DIA with IIP + Investments: This strategy combines the elements of strategies 3 and 4, with the investor integrating both PLI and DIA with IIP products into their financial plan.

A Comparison of the 5 Strategies

The comparison of the five strategies involved assessing a baseline of traditional investment approaches and juxtaposing them with strategies integrating PLI and DIAs with IIP:

For strategies incorporating PLI and a DIA with IIP, the value of these products was factored into the total financial assets and considered part of the fixed income allocation. Consequently,  when investors allocate a portion of their wealth to insurance products, the amount invested in bonds decreases compared to the investment-only strategy.

In the analysis, the cash value of PLI (accessible via surrenders or loans) was utilized to finance retirement income during periods of market volatility. This approach enables investors to avoid liquidating assets from traditional investments that may have depreciated.

The investor’s assets were divided between investments and insurance products. Various product allocation combinations were simulated, incrementally adjusting by 10% of total annual savings for PLI and projected wealth at age 55 for DIAs with IIP.

Allocation percentages were capped at 60% for PLI and 30% for DIAs with IIP. For each allocation combination, they computed the after-tax retirement income an investor could sustain in over 90% of market return scenarios. The legacy value was also calculated at the end of the time horizon.

Key Insights from the Analysis

1. PLI + Investments = a Great Combo: Strategies combining PLI with investments tend to outperform investment-only and term life + investments strategies in the long run. PLI provides superior returns over fixed income, while PLI loans a buffer against market volatility.
2. DIA with IIP + Investments for Retirement Income: Strategies integrating DIA with IIP with investments excel in providing retirement income. Although legacy may be lower than PLI + investments, it outperforms the investment-only strategy due to mortality credits and dividends.
3. Efficiency of Integrated Strategies: Integrated strategies are more efficient than investment-only approaches. Allocating a portion of assets to PLI and DIA with IIP boosts retirement income and legacy compared to investment-only strategies.
4. Benefits for Higher Risk Appetite Investors: Integrated strategies remain beneficial for investors with higher risk appetites, providing flexibility and improved retirement income and legacy outcomes.
5. Flexibility in Financial Outcomes: Integrated strategies offer flexibility to focus on retirement income, legacy, or a balance between the two. The right mix depends on the investor’s preferences and financial goals.
6. Appropriate Allocation Levels: Allocation levels up to 30% of annual savings to PLI and up to 30% of wealth at age 55 to DIA with IIP may be appropriate for optimizing retirement income and legacy value outcomes. Results vary by investor starting age.

Conclusion

An integrated approach combining PLI and DIA with Increasing income potential in retirement planning can provide legacy protection, tax-deferred savings growth, and guaranteed income for life. Insurers can leverage these products to enhance relationships with investors and address gaps in the retirement market.

Ready to explore how PLIs and DIAs with increasing income potential enhance retirement benefits? Contact David Lerner Associates to discuss personalized strategies tailored to your financial goals and needs.

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Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.