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457 Plan Protection + Tax-Free Income

by smeneshi - Feb 25, 2015

What started out as a quiet Saturday morning led to dinner with my wife at a nice restaurant. We decided to celebrate a major financial victory – in just about 1 hour we easily put $1,700 back in our pockets.  How did it happen? On and off for a while it occurred to me that we both have good driving records, modest vehicles, and high credit scores, so why did our monthly car insurance payments seem so high? Finally, I decided to find out, so I called a reputable insurance company and asked for a quote. We were paying about $1,500 a year for two cars, and after just a half hour, the insurance company  came back with a better figure: $1,100.

“That sounds good to me” I told the insurance agent, so I called my insurance company and asked for the cancellation department.

“I’m sorry to hear you’re thinking of leaving us…may I ask why” the nice lady on the other end of the line asked.

“Yes, but to be honest, I really don’t want to leave you. I’ve been a customer for over 15 years and I really like your service and for the couple of claims we’ve had, you’ve treated us very well. Plus, I really hate the idea of redoing my automatic deductions, but the truth is, another insurance company just offered us the same coverage for much less money – $1,100 a year.”

The lady responded “Well, if you don’t mind just holding a minute, let me see what I can do.” After a while, the woman came back and said “Sir, you can keep the same coverage, but for only $900 a year. Does that sound good to you?”

“Absolutely!” I told her.

So in about 45 minutes, we dropped our car insurance from around $1,500 to $900 a year; a savings of $600 a year. Since this worked so well, I decided to ask what they could do about our home insurance.  After all, our yearly premium jumped by 80% after we put in a claim because our basement flooded in 2013.  I told the insurance company that we put in a flood control system, so the chances of flooding again are next to zero.  Well, this dropped our premiums by about $500!  Since I was on a roll, I called our cell phone carrier next and by the end of the 5-minute call, our rate dropped from $150 a month down to $110, still with unlimited minutes, text and a plenty of data.  Another $480 in annual savings.

I figured since it had been easy to save so much money, why not call my Internet and cable TV providers. There was nothing I could do with my Internet bill since I’m locked into business-class service for another year, but my cable TV provider did drop our bill by $10 a month and even added premium channels for six months. It wasn’t what I was hoping for, but was happy to take the deal.  All in all, we wound up saving about $1,700 a year.

Now, conventional wisdom say’s to take those savings and invest them for the long haul, but in my opinion, since most of you reading this are Baby Boomers, you’re probably fairly well-off because of the saving that you did earlier in life, and investing an extra $1700 a year for the next 5-10 years won’t really make a dent in your lifestyle.

But, if you simply reposition that extra $1,700, you can make a huge impact on you and your spouse’s well-being at some point down the road.  A HUGE impact.  How? By protecting what’s probably your second largest asset – your 457 deferred comp plan.  So how can you do that?

 

457 plan and life insurance with LTC rider

 

One way is to outright buy a long-term care insurance policy because of the very real risk that long-term care expenses pose to you and your family, both financially and emotionally. By doing this, you’re at least guaranteeing to a certain degree that you and your spouse won’t be wiped out if you get sick, develop dementia or Alzheimer’s, or can’t recover from an injury or surgery. Even though many of you have seen you or your spouse’s parents deal with long-term care issues, still less than 9% of Baby Boomers haven’t protected their precious savings with long-term care insurance. But there are a few reasons why.

First, policy premiums can get bumped up, and if your pension and Social Security payments are only increasing 2-3% a year, a jump in policy premiums can become uncomfortable after some time. Also, there’s the perception that if you don’t need care, you’ll have ‘thrown away’ years worth of premium payments. While insurance premiums of any sort (home, car, liability, and long-term care) are being paid to cover a risk and those premiums are in no way a waste of money, I understand the psychology that exists specifically when it comes to long-term care insurance.

So what’s another way to leverage your savings so that you and your family won’t get devastated by long-term care costs? If you can cut your monthly living expenses the way my wife and I did – without even changing our lifestyle, what else can you do with those savings, other than invest them? If protecting you, your spouse, and heirs from potentially crushing long-term care expenses is of any concern whatsoever, then a good option is to strongly consider buying a life insurance policy with a long-term care rider. And why might this be a better option than simply buying an LTC policy outright? Of course, it depends on the individual and circumstances, but you know that as long as you keep paying your life insurance premiums,  a benefit will be paid out – albeit when you die – but nonetheless, it will be paid.  So in that sense, you won’t get the feeling that you’re ‘throwing away’ your money. Also, if you pick the right type of insurance, your premiums will never go up, so you won’t have any surprises later in life.

Another thing to keep in mind is if you do need to pay for long-term care, you can simply tap into the life insurance policy’s death benefit. In other words, you turn a death benefit into a living benefit. And if you recover and don’t need LTC any longer, then any unused death benefit is paid to your spouse after you pass away.  If your surviving spouse needs long-term care, he or she can just tap into savings, your 457 plan or other deferred comp accounts, or the insurance policy proceeds that were paid out.

Finally, as it relates to insurance and specifically the public sector, I’ve written before that a potential huge tax trap is waiting for Baby Boomers.  The reason is many of you have a decent-sized pension coming your way, you’ve saved tons of money into your 457 plan, your spouse may still work even after you retire, and you might even pick up a part-time job or start a business.  What this all means is you might be bumped into a higher tax bracket when you retire, so it would be nice if you can actually pull tax-free income from somewhere.  And that somewhere could be your life insurance policy.  How is this even possible?  Well, you’ll have to stay tuned, but what I’ve shown you is by lowering your monthly expenses (without cutting back on your lifestyle) you can not only defend your retirement savings from high long-term care costs, you may even get to enjoy tax-free income!  Overall, that’s a hell of a deal all wrapped into one!

 

Securities and advisory services offered through Ausdal Financial Partners, Inc.  Member FINRA/SIPC 5187 Utica Ridge Road Davenport, IA 52807    563-326-2064  www.ausdal.com.  Public Retirement Planners, LLC and Ausdal Financial Partners, Inc. are separately owned and perated.

One response to “457 Plan Protection + Tax-Free Income”

  1. Laura says:

    HI Sev
    I hope you are doing well with your business.
    Laura

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