Most of us think about life insurance as income replacement for a breadwinner’s salary. That is certainly true. However, life insurance doesn’t stop being useful during the later years, says Kiplinger in a recent article, “Don't Overlook Advantages of Making Insurance Part of Your Retirement Plan.”
The income replacement function doesn’t go away during retirement. It might even be more important.
When a spouse passes away during retirement, the surviving spouse frequently struggles financially. Some living expenses might be less when there’s just one person in a household, but the reduction in costs rarely makes up for the drop in income. One of the two Social Security checks the couple was getting goes away, and a pension payment may also be lost or reduced 50% or 75%. Life insurance can be leveraged to make certain there’s sufficient cash to compensate for that missing income. This lets the surviving spouse maintain his or her standard of living in retirement.
There are several sections of the tax laws that give life insurance income tax and transfer tax benefits. For example, death benefits typically are paid income-tax-free to beneficiaries and may also be free from estate taxes, provided the estate stays under the taxable limit, or, if over the federal or state estate tax exemption amounts, the life insurance policy is owned and the beneficiary named is an Irrevocable Life Insurance Trust (ILIT) . Any benefits paid prior to the insured’s death because of chronic or terminal illness are also tax-free. This is called an accelerated death benefit (ADB) and is a relatively new option. If your insurance doesn’t have this coverage, it can probably be added as a rider.
Finally, cash values can grow within a permanent life insurance policy without being subject to income tax. Any cash values more than the policy owner’s tax basis can be borrowed income-tax-free, as long as the policy stays in effect. However, if you were to pass away prior to paying back your policy loan, the loan balance plus interest accrued is deducted from the death benefit given to the beneficiaries. This may be an issue if your beneficiaries require the entire amount of the intended benefit. When the loan remains unpaid, the interest that accrues is added to the principal balance of the loan. If the loan balance increases above the amount of the cash value, your policy could lapse. That means you could you risk termination by the insurance carrier. If a policy lapses or is surrendered, the loan balance plus interest is considered taxable, and the taxes owed could be pretty hefty, based on the initial loan and interest accrued.
There are fees that can includes sales charges, administrative expenses and surrender charges. That is in addition to the cost of the insurance, which grows as you age.
Just because you’re retired, doesn’t mean you don’t still need the protections and benefits that life insurance can offer you and your family. To learn more about how you can best protect your policies and other assets, explore our blog and visit our website to schedule your free consultation today!
Reference: Kiplinger (July 10, 2019) “Don't Overlook Advantages of Making Insurance Part of Your Retirement Plan”