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Is Life Insurance Important During Retirement?

Most people purchased life insurance when they were working in order to protect their loved ones and don’t think it’s important after the kids are grown and the paychecks stop.  However, there are actually a number of good reasons to consider having life insurance during retirement.

If you already have permanent life insurance, will the same policy you purchased 10, 20, or 30 years ago still address your needs after you leave your job? The insurance needs of a retiree are different from those of a working person.  In your working years,insurance protects your loved ones, “just in case…” and meanwhile you are accumulating assets for retirement.  After retirement, “just in case,” becomes a “when,” and you enter the preservation and distribution stage with your retirement assets.

The insurance needs for those two stages are very different, and it makes sense for those in or near retirement to review your existing insurance to make sure it still addresses your needs.

The good news is that for many, getting the insurance you need to cover your retirement needs doesn’t have to tie up needed cash, and for those with an existing policy, it might even be free.

Here are four reasons a retiree may need life insurance or may need different insurance than they currently own.

1) WEALTH TRANSFER

Many people recognize that they’re unlikely to “die broke” – that there’s a portion of their asset that will be transferred to their heirs.   Life insurance is a great way to facilitate that transfer:

  • The death benefit is predictable and not subject to market risk
  • The money is transferred immediately and with no transfer costs after death
  • The death benefit is income tax free.
  • By definition, life insurance takes a relatively small amount of money now and turns it into a much bigger amount upon death.  The returns are generally much higher than in any other sort of safe investment, depending on the age and health of the insured at policy inception and the age at death.
  • The money to pay for a new policy can often come painlessly, without affecting your current or future lifestyle.   This money can come from
    1. An existing, less appropriate policy
    2. Non-productive assets, for example money sitting in a bank not earning anything
    3. An income stream that’s not needed for living expenses, for example money that the IRS requires you to take out of your IRAs every year. 

2) LONG-TERM CARE INSURANCE

The need for long-term care is a serious concern for most elderly.   It’s estimated that 7 out of 10 of us over age 65 will need some form of long-term care during our lifetime.  The costs of long-term care can quickly devastate a person’s assets.

Long-term care insurance on its own is expensive, and in the end, you may not use it.  Furthermore, long-term care insurance premiums are not guaranteed, and they can and do go up, sometimes dramatically.   Many people with older policies have seen their rates skyrocket by more than 50% and some by more than 100% in recent years.  Even if you can afford it now, it may become unaffordable later.

One solution is a life insurance policy that makes a portion of the death benefit available to pay for long-term care.  Like the death benefit, the long-term care benefit is tax-free.   Whatever portion of the death benefit is not used for long-term care goes to your heirs at death.   And the premiums are guaranteed.   These policies that combine life insurance with long-term care are a great solution to multiple problems and have become very popular.

3) MAKE THE MOST EFFICIENT USE OF THE CASH IN YOUR POLICY

Permanent life insurance builds up cash value over time.  When you started the policy, this seemed like a nice benefit, that you would have cash available in case you needed it for an emergency.   You did not need that cash over the years and now have other assets available in case of emergency.    Most people don’t realize that after death, the beneficiaries get only the death benefit, but the company keeps the cash value.  In many cases, by transferring that cash value to a new policy, you can get a much higher death benefit without increasing your premiums.

For example, we recently had a client with a life insurance policy that had a death benefit of $128,694.  We were able, at no cost, to get her a new policy with a death benefit of $149,131 and exactly the same premium.

Alternatively, you may decide that you really want to have access to the cash value during your lifetime.  In that case, it may make sense to do a tax-free transfer of that cash value to a vehicle that will give you better growth and better access to your money.

4) ESTATE EQUALIZATION

Most people have non-liquid assets, such as a home, a vacation home or a business.   If there are three children, and only one of them is interested in owning one of these non-liquid assets after the death of the parents, the other kids will need to be bought out for their shares. Where is that money going to come from?  Life insurance can provide a ready source of liquid cash that can make the whole inheritance process much smoother and easier for everyone.

In short, there are good reasons to evaluate your need for life insurance during retirement, and to review any existing policies.This should be done with an experienced financial advisor who thoroughly understands insurance and taxes and the specialized needs of retirees.

At AGT Tax and Insurance Services, we offer a free insurance review and overall financial consultation with Aryeh Goldbloom, president of AGT.  Aryeh has over 15 years’ experience working with seniors, helping seniors preserve their wealth, plan for the next generation, minimize their taxes, and customize their insurance to meet their current needs.

Life Insurance during retirement is also one of the topics covered in our complimentary dinner seminar.  For those in the Chicagoland area, these seminars are a great opportunity to learn how to avoid the common mistakes people make in retirement and to prosper despite the economic uncertainty around us.

Call us to set up your free financial consultation or to register for a seminar.

847-933-9222