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.
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.
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