Do I Still Need Life Insurance in Retirement?
Key Points – Do I Still Need Life Insurance in Retirement?
- Reasons to Have Life Insurance
- What About Life Insurance in Retirement?
- Life Insurance as an Estate Planning Tool
- Life Insurance and Long-Term Care Expenses
- 4 minute read
Reasons to Have Life Insurance
Life insurance can be an integral part of your financial plan. You’re probably familiar with some of the many reasons to have life insurance.
For instance, when I started my career at Barber Financial Group, I enrolled in our group term life insurance benefit. I wasn’t married yet but wanted to take advantage of the low premiums. I just wanted to make sure that my family would receive some money to cover my final expenses if something happened to me.
A few years later, I married my high school sweetheart, Lauren. Shortly after that, I increased my life insurance coverage so that if something happened to me, Lauren would be able to replace my income for some time while she adjusted. I would continue to increase my life insurance coverage as specific events in my life came about. First, when we bought our first home together and again when our daughter, Remi, was born.
Today, if I were to pass away, my family would be using the proceeds of my life insurance policies to pay off any debt we owe. Items like our mortgage, replace my income for a time, and help pay for future planned expenses, such as Remi’s college (that is if she doesn’t get a full-ride scholarship to my alma mater).
What About Life Insurance in Retirement?
For many people in similar situations to my own, life insurance makes sense for various reasons. But what about individuals who are approaching retirement or already retired? Do they still need life insurance in retirement? The answer, like most things in personal financial planning, is “it depends.”
Life Insurance with a Pension
If you are retiring with a pension from your current or a former employer, you may want to take a closer look at your life insurance needs.
Many times, a defined benefit pension plan will offer several claiming options. Options may include:
- Single life option: Pays a benefit as long as the person who claimed the benefit is still living
- Joint-and-Survivor options: Usually pay out a pre-determined percentage of the original monthly benefit to a designated beneficiary, such as a spouse
- Period-certain option: Pays out the benefit for the greater of the retiree’s lifetime or a pre-determined period of years, such as 5, 10, or 15 years
Before selecting your claiming option for your pension, it is a good idea to examine your options. Should you claim an option with survivorship benefits? Or should you use life insurance to offset a loss of income due to an early death?
Life Insurance as an Estate Planning Tool
Life insurance can be a helpful tool with estate planning as well. In the past, families with a large net worth greater than the estate tax exemption amount would use Permanent life insurance.
Back in 1997, the estate tax exemption exempt $600,000 of one’s estate from taxation. However, anything in one’s estate that exceeded the exemption would be subject to the tax, which had a top tax rate of 55%.
A common strategy was to pair life insurance with an irrevocable trust to ensure the insurance proceeds would not be subject to the high estate tax rates.
Over the years, the estate tax exemption has increased to where it now stands at $11.7 million. With the exemption being as high as it is today, most families no longer need to be concerned with an estate tax.
However, with the Tax Cuts and Jobs Act of 2017 set to expire by 2026, this exemption amount is set to decrease, barring any action taken by Congress. We may see a return to the mass affluent utilizing life insurance in their estate planning, focusing on estate tax mitigation.
Leaving a Legacy
Some retirees prioritize leaving a financial legacy to their families or organizations and causes they feel passionate about. In some cases, one can use life insurance to ensure that the desired amount of wealth transfers from this generation to the next. Life insurance can take some of the guesswork out of the question, “How much will be left when I die?”
If you have an amount of money you want to ensure passes to your loved ones, charity, church, or other organizations, life insurance can be of use. Designated beneficiaries could help offset the chances that an underperforming stock market or investment portfolio will fail to reach the value you have in mind.
Life Insurance and Long-Term Care Expenses
You can also use life insurance to pay for qualified long-term care expenses. Traditionally, if someone desired to transfer the risk of paying for long-term care expenses, they would have to find an insurance carrier who offered long-term care insurance.
Today, this insurance can be extremely costly. With many policies, your annual premium payments may be subject to increases over time that become difficult to budget around.
One of the solutions the life insurance industry has created is a hybrid policy. For example, traditional life insurance policies with a premium payment and a death benefit.
In this example, if the policy owner needs to pay for long-term care expenses, such as assisted living facilities, the policy would begin to pay out the death benefit to cover these expenses, even before the insured person has died.
It’s a Retirement Planning Tool
There are still many reasons to consider life insurance as a tool to be used in retirement planning, even if it falls outside of the traditional “income replacement” lane.
However, it’s important to know why you own life insurance and how it fits in your overall financial plan. Make sure you are never sold an insurance policy without knowing what the objectives are for the policy and how it can help accomplish your financial goals.
Jason Newcomer, CFP®, AIF®, EA
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The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.