Objective information about financial planning, investments, and retirement plans

Do I Need Life Insurance in Retirement?

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My fellow Baby Boomers and I have been told that life insurance is generally not needed once we retire. The thought was that we would have accumulated sufficient assets and our dependents are grown and self-sufficient.  This is great in theory, but may not hold true in practice.  Here are a few thoughts as to why you might need life insurance as you approach retirement.

Universal Life Insurance Company

An estate-planning tool

Life insurance can be used to help your heirs pay any estate taxes that might be due. At the federal level, the exemption is scheduled to fall to $1 million in 2013 and the estate tax rate is scheduled to increase. In addition there may also be estate taxes at the state level to consider. Life insurance can be used by your heirs to pay the estate taxes and allow the rest of your assets to pass to them as you intended.  There are many considerations in using life insurance as an estate planning tool, including how the policy is owned.

A bridge to “final” retirement

Retirement continues to evolve for Baby Boomers and will be different than the retirement our parents experienced. By this I mean that many of us will continue to work into what were traditionally retirement years, either because we want to stay active and connected or out of financial need (or sometimes both). Perhaps working a few more years will allow you to amass the nest egg that you need to be able to retire “cold turkey.” If you die prior to being able to accumulate enough assets, life insurance can fill the financial gap for your surviving spouse.

Assistance for a child with special needs

If you have a child or grandchild with special needs, life insurance can be a means to provide funds for his or her care after you are gone.

A means to fund charitable intentions  

You can leave a charitable bequest by making the organization the beneficiary of your life insurance policy.

A tool to help pass on a business

Life insurance can be used to fund a buy/sell or similar business succession arrangement. The life insurance proceeds can be used to buy out your heirs and to allow the business to go to the remaining owners.

If you die this business ownership interest will be a part of your estate and could be subject to estate taxes. Life insurance can be used to pay those taxes and allow the business to remain in the family if so desired.

As a supplemental retirement plan

Cash value life insurance is often touted by life insurance agents and commissioned financial representatives as a supplemental retirement savings vehicle.  They tout the ability to borrow against the policy’s cash value in retirement without having to pay the money back.  Besides potentially reducing the policy’s death benefit, you have to manage the amount borrowed.  Additionally you need to ensure that that all premiums are paid as required to ensure that you don’t trigger an unintended taxable event.

Further you really need to understand the underlying growth assumptions in the policy illustrations you will be shown.  Often the rate of growth of the underlying investments is unrealistic and this can lead to a need to fund the policy to a greater extent than you had planned while working in order to build the level of supplemental retirement assets you had intended.  While this can be a viable strategy, make sure that you understand all of the underlying assumptions before heading down this path.

Whether or not to own life insurance during retirement will be dependent upon having a risk to insure against. It can be easy to be sucked in by life insurance agents portraying it as an investment or a tax shelter. While everyone’s situation is different, in my opinion, life insurance should be viewed as a death benefit. This should drive your decision, whether this involves keeping a policy in force or purchasing a new policy.

Questions about your need for life insurance or about retirement planning in general?  Please feel free to contact me with to discuss your unique situation.

Photo credit:  Flickr

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Comments

  1. Thanks, Roger, it’s good to see an objective discussion of an emotional topic.

    Military retirees often have to balance the decision between the military’s long-term Survivor Benefit Plan (premium of up to 6% of a pension for 55% survivor benefits, indexed to inflation) versus term insurance for a shorter specific period. After 20-30 years of military service, it’s all too easy for retiring veterans to be swayed by persuasive sales talk of “tax-free insurance benefits” when they only really need SBP or term.

    • Roger Wohlner says:

      Doug thanks for your comment. Sadly emotions are often used to sell life insurance when in fact this is just another aspect of financial planning and the purchase should be based upon the projected need for a death benefit.

  2. Before my auntie died, she turned over her properties to all her heirs, including her children, grandchildren, nieces, and nephews. We did not pay for any estate tax as she either “sold” them to us or gave them as gifts.

  3. Franz G says:

    Selling an existing life insurance policy might also be an attractive option for those deciding NOT to keep it. Also for the buyers of such policies it can be a highly attactive asset.

    • Roger Wohlner says:

      Thanks for your comment Franz. This can be a great avenue for policies that are no longer needed or for the terminally ill. Like all things consumers need to make sure they are getting a good deal, comparison shopping is warranted.

  4. Thanks for this article. I have always known about estate taxes but never had the idea of paying them with life insurance. Every day you learn something new =)

    • Franz G says:

      isn’t the qustion in this respect whether the ongoing premiums you will have to pay for such a life insurance policy will (if the insurance carrier got its risk calculation right) outweigh the potential estate taxes which the heirs will be facing upon death of the policyholder? So why not just leave them with more cash? Of course for very risk averse persons with huge estate values it might be an option!

      • Roger Wohlner says:

        If you just leave your heirs the cash outright it will be subject to estate taxes. Obviously the premiums are a factor, but for someone with enough assets to have a major estate tax issue in my experience the premiums generally pale in comparison to the potential estate tax hit. With the new estate tax rules for 2013 the threshold for paying onerous estate taxes has been lowered.

      • It all depends on every individuals situation. I believe if you plan for this strategy you can make it work.

        • Roger Wohlner says:

          Exactly, life insurance is a financial tool and if used correctly it can be in integral part of one’s financial and estate planning. The key is unbiased advice vs. a sales pitch from some commission hungry agent or rep.

    • Roger Wohlner says:

      Marvin thanks for the comment. Life insurance can be a great vehicle for folks with a sizable estate to make provisions for the payment of estate taxes. It takes planning and a knowledgeable advisor to make sure things are done correctly, including details like policy ownership.

  5. Rob says:

    My wife and I were just discussing this topic. I’ll be in my late 50s when my 20-year term expires, and I don’t plan to renew it. But life insurance to fund a buy/sell has been on my mind. I’ve seen this when partners use insurance to buy the other out when one dies. Can the same thing be done with two separate businesses?

    • Roger Wohlner says:

      Thanks for your comment Rob. I’m not sure that I understand your question, if you’d like I’d be glad to discuss “off-line.” Please feel free to email me via the contact form here on the blog if you’d like to discuss.

  6. Paul Puckett says:

    Life insurance may also allow “guilt free” spending as the death benefit offsets reduction of the estate. But this is not a time for term insurance….

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