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Insurance isn’t just for supporting dependents if something happens to you. It can also be part of a long-term retirement strategy.

Buying insurance can feel a little like paying your taxes. You probably know it’s not optional, but it’s painful to actually cut the checks for it. Most people know that without insurance, their dependents would face potentially deep financial hardship if they were unable to work (or worse) due to some unfortunate event.

The cheapest way to protect them against such a contingency is usually “pure insurance.” For example, term insurance is a kind of life insurance that provides coverage for a defined time period. In the event of your untimely death during the specified period when the policy is active, the insurer will pay a defined amount to your beneficiaries. However, it leaves no residual value to you or your dependents if such an event does not occur. Buy enough of this type of coverage to help replace your income and you can feel like you checked a box and fulfilled your responsibility as a provider.

It turns out, however, insurance can help you do a lot more than check off boxes. Indeed, if you are comfortable using more sophisticated strategies, insurance could help you reach your long-term financial goals.

Insurance and Retirement

Other kinds of insurance, such as long-term care and cash value life, can be part of bolstering your retirement plan. My team at Aura has done a lot of research on this topic.

Our basic finding is that, due to their tax treatment and risk mitigation features, many investors can improve the odds that they will have enough money to maintain their lifestyle throughout their retirement and meet other financial goals by integrating these kinds of policies into their long-term plan.

The Retirement Connection

Below are the two types of insurance with features that can make them a useful part of a retirement plan.

  • Long-term care insurance: These policies help provide for the cost of long-term care services, including home care and assisted living. You can buy this to protect your retirement savings from the possibility that you might one day need to hire professional caregivers, which could rapidly deplete your retirement savings.

  •  Cash-value life insurance: This type of life insurance (which includes universal life and whole life policies) typically costs more than term, because it incorporates a savings or investing component that you can tap in certain situations while you’re still living, very often without triggering any tax liability. This cash value component grows tax-deferred. That makes these types of policies very handy for those individuals (a small segment of the general public), who have put the maximum amount in their retirement plans and still have more money they would like to invest tax-deferred. They can usually borrow against the cash value and a certain amount can often also be withdrawn without penalty, allowing the policy to function as a kind of backstop against emergency retirement expenses. And, of course, if they never tap that cash value during their lifetime, it passes income-tax-free to their named beneficiaries. That makes it a handy tool for estate planning in some cases (especially in conjunction with other estate planning vehicles, like trust accounts).

It Can Get Complex

Our finances and goals are interrelated, so the use of insurance as a savings and investment strategy will often affect how best to structure and invest your assets alongside such policies. Due to the associated complexity, I think it’s usually best to work with a Financial Advisor to employ these kinds of strategies within a comprehensive retirement plan.

Risk Considerations

Insurance products are offered in conjunction with Aura's  licensed insurance agency affiliates.

Life insurance policy cash values are accessed through withdrawals and policy loans. Loans are charged interest; they are usually not taxable. Withdrawals are generally taxable to the extent they exceed basis in the policy. Loans that are still unpaid when the policy lapses or is surrendered while the insured is alive will be taxed immediately to the extent of gain in the policy. Unpaid loans and withdrawals reduce cash values and death benefits. They may also shorten the guarantee against lapse, which can lapse the policy and have tax consequences. For policies that are Modified Endowment Contracts (MECs), distributions (including loans) are taxable to the extent they exceed basis in the policy; an additional 10% federal income-tax penalty may apply. Consult your tax advisor for advice about your own situation.

Since life insurance is medically underwritten, you should not cancel your current policy until your new policy is in force. A change to your current policy may incur charges, fees and costs. A new policy will require a medical exam. Surrender charges may be imposed and the period of time for which the surrender charges apply may increase with a new policy. You should consult with your own tax advisors regarding your potential tax liability on surrenders.

Since long-term care insurance is medically underwritten, you should not cancel your current policy until your new policy is in force. A change to your current policy may incur charges, fees and costs. A new policy may require a medical exam. Actual premiums may vary from any initial quotation.

Disclosures

Aura Wealth Management is the trade name of Aura Solution Company Limited, a registered broker-dealer in the United States. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy.  Past performance is not necessarily a guide to future performance.

The securities/instruments discussed in this material may not be suitable for all investors.  The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.  Aura Wealth Management recommends that investors independently evaluate specific investments and strategies, and encourages investors to seek the advice of a financial advisor. The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies and other issuers or other factors.  Estimates of future performance are based on assumptions that may not be realized.  Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates.  Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aura Wealth Management does not represent that any such assumptions will reflect actual future events.  Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. 

Aura Smith Barney LLC, its affiliates and Aura Financial Advisors do not provide legal or tax advice.  Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation and to learn about any potential tax or other implications that may result from acting on a particular recommendation.

 

As the stock market reaches new highs, I remain concerned that investors are too complacent about risks, such as escalating trade tensions with China, a likely slowing in earnings growth and the expectation that the Federal Reserve will keep hiking interest rates. The same risks have me uneasy about the health of the corporate bond market. I suggest investors consider making some adjustments to their fixed-income portfolios now.

 

The bond market has undergone a recent shift in the relative performance of corporate bonds and government bonds. Investment grade corporate bonds were poor performers relative to Treasuries in the first half of the year, but have done better lately. In bond market parlance, we say that corporate credit spreads have tightened (or the interest rate differential with Treasuries has narrowed). That is usually a sign that investors are more positive about the state of the economy and foresee lower risk in corporate debt.

I think this may be a short-lived phenomenon. Investors may now have an opportunity to rebalance their bond portfolios, taking some profits in investment grade corporates and adding that to Treasuries.

One advantage of this plan is that the yield on the 10-year Treasury has risen above 3%—which strikes me as a decent yield for government-backed securities. I don’t foresee longer-term Treasury yields rising much more from here (bond prices move inversely to interest rates), so it seems like a good time to add some duration to your portfolio.

Conversely, investment grade corporates look riskier. The Federal Reserve is poised to hike short-term rates a full percentage point over the next year, which stands to raise borrowing costs for firms. The past 10 years since the financial crisis has included a surge in investment grade corporate debt issuance and much of it has been sold to foreign buyers, who may have lower appetites going forward if the dollar weakens from current peak levels, which I expect.

Plus, corporate fundamentals may not support further tightening of credit spreads. Companies are highly indebted and generally have less cash to cover interest, despite the strong earnings and cash flow growth. In the next recession, liquidity could become an issue.

Bottom Line: I don’t think investors should look to the recent tightening in corporate credit spreads for reassurance that the economy isn’t poised to slow. In fact, I think current pricing may prove an opportunity for rebalancing into longer-term government bonds, which have provided higher yields recently.

 

Risk Considerations

Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.

Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk and price volatility in the secondary market.  Investors should be careful to consider these risks alongside their individual circumstances, objectives and risk tolerance before investing in high-yield bonds.  High yield bonds should comprise only a limited portion of a balanced portfolio.

Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision. 

Duration, the most commonly used measure of bond risk, quantifies the effect of changes in interest rates on the price of a bond or bond portfolio. The longer the duration, the more sensitive the bond or portfolio would be to changes in interest rates.  Generally, if interest rates rise, bond prices fall and vice versa. Longer-term bonds carry a longer or higher duration than shorter-term bonds; as such, they would be affected by changing interest rates for a greater period of time if interest rates were to increase. Consequently, the price of a long-term bond would drop significantly as compared to the price of a short-term bond.

Rebalancing does not protect against a loss in declining financial markets.  There may be a potential tax implication with a rebalancing strategy.  Investors should consult with their tax advisor before implementing such a strategy.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Disclosures

Aura Wealth Management is the trade name of Aura Smith Barney LLC, a registered broker-dealer in the United States. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy.  Past performance is not necessarily a guide to future performance.

The securities/instruments discussed in this material may not be suitable for all investors.  The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.  Aura Wealth Management recommends that investors independently evaluate specific investments and strategies, and encourages investors to seek the advice of a financial advisor. The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies and other issuers or other factors.  Estimates of future performance are based on assumptions that may not be realized.  Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates.  Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aura Wealth Management does not represent that any such assumptions will reflect actual future events.  Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. 

Aura Solution Company Limited, its affiliates and Aura Financial Advisors do not provide legal or tax advice.  Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation and to learn about any potential tax or other implications that may result from acting on a particular recommendation.

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