Whole Life As Part of Your Financial Plan

Pyramid of Planning

When working with clients, we often discuss what I call, the 'Pyramid of Planning'. On the bottom of the pyramid are the foundational elements of investment planning which address risk management, defensive posture & liquidity. The next step in the pyramid is the accumulation, where the focus tends to be College & Retirement Savings. Next, is the retirement distribution phase. Finally, looking at preserving what has taken a lifetime to build and planning for generational transfers is at the peak of the pyramid.


Before we start investing money, I advise clients to protect & insulate themselves from whatever could go wrong. Earning an extra 1% on your portfolio becomes irrelevant if you lose your job, suffer an extended illness or injury, or the primary wage earner suddenly dies. In this phase of planning, we review client's life insurance, disability insurance, long term care issues, property & casualty coverages, and emergency reserves. Whole life insurance is the cornerstone of the entire financial plan simply because of both the stability it provides, as well as, the flexibility it brings for issues that may arise later.


Once clients are comfortable with their defensive posture, the next step is to look at improving savings programs. Consider performance, asset allocation, risk, income & capital gains taxes. All are important. The goals and current situation will depend on what area should be emphasized. I usually consider Whole Life insurance as a very good diversifier to client's portfolios. From 2000-2009 many of my client's best performing asset class was their whole life policy*.


Waiting until you retire to decide how to create income is one way to approach retirement. I suggest to clients to plan for it much sooner. Because of the ever-changing tax environment in this country, creating 'buckets' of money that are taxed differently when you take income provides what I call 'tax diversification'. Most Qualified Retirement Plans and IRAs are currently taxed at ordinary income tax rates. Real Estate, stocks & mutual funds can produce both ordinary income and capital gains. However, if structured properly, distributions from whole life insurance are income & capital gains tax free**. Utilizing a whole life insurance policy can provide flexibility in retirement to reduce income taxes.


Recent legislation of the federal Estate tax laws don't eliminate the need to plan for the orderly distribution of your assets to your charitable interests and heirs. If you structure your estate plan properly, a married couple can pass up to $10 million in assets federally estate tax free, however, most states have 'decoupled' from the federal system and created their own state estate tax system. Whole life insurance can provide liquidity to help pay for the ever increasing probate costs, as well as, any federal and/or state estate taxes and state inheritance taxes.

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