Life insurance is undoubtedly a difficult conversation to have—no one wants to pass on prematurely, but what happens if you do? You’ve worked hard to save money for retirement and you need to be sure that you can protect the legacy you’ve built and provide for your loved ones, should anything unfortunate happen.
Losing a loved one is difficult enough without the added stress of covering short term costs while assets are locked up in probate. With life insurance, the death benefit is payable upon death (i.e. it doesn’t have to go through probate), which means that, unlike other assets, your policy beneficiaries can access the cash immediately.
When it comes to life insurance, how do you know if you have enough, or too much? Ultimately, your life insurance policy can look different depending on your goals and purpose for retaining a policy. For example:
- Will your family be able to afford the same lifestyle if you pass early?
- How many years could your family get by without your income before their savings are depleted?
- Are you confident you're providing enough for your children after your passing?
- Are you looking for additional coverage with LTC insurance?
Incorporate Life Insurance into Your Long-Term Financial Plan
With most retirement accounts, like 401ks and IRAs, somebody is going to pay taxes on those funds at some point. Either you’ll pay taxes as you withdraw from the account, or your beneficiaries will pay taxes when they spend the money they inherited.
One way to avoid passing taxes on to your heirs is by investing in life insurance as part of a tax-efficient legacy. If leaving more money to your children, grandchildren and other loved ones is a high priority, funding a life insurance policy might be an option for you. Once you reach age 70 ½, if your required minimum distributions (RMDs) exceed what you need for lifestyle spending, then you can use the excess funds toward a life insurance premium. This leverages your dollars up because the amount of tax-free life insurance it buys is going to be a lot more than what your beneficiaries will receive after inheriting (and paying taxes on) your IRA.
Ensure You Have Insurance Coverage after Retirement
As you approach retirement, it’s time to start thinking about your life insurance coverage. While you may have some life insurance through work, most employer-sponsored plans aren’t portable, meaning you may lose that coverage once you retire. If your policy does expire once you leave the company, you might want to consider adding independent coverage.
With a private, individual plan, you can retire and the insurance will follow you, and individual insurance could be cheaper. That’s because when you have the quotes for an employer plan, they’re blending everybody in the company together and then average the pricing to create a standard premium across the company. If you’re generally healthier, you could probably get a lower premium with a private plan.
Choose a Policy to Meet Your Goals
Choosing to seek individual insurance comes with choices, like whether term or permanent life insurance will help you reach your goals, or if you would benefit from a long-term care (LTC) hybrid policy. Consult with your financial advisor to explore options available to you. After clarifying your goals and objectives, your advisor can help you find an appropriate product to fit your needs.
With a term plan, such as a 20-year term policy, your premium is going to stay exactly the same for the length of your term. As the name implies, these policies are designed to only last a temporary period of time, and while a term policy can be appealing due to lower premiums, the policy usually expires well before the end of the policyholder’s life. Once your term is up, you have a choice: you can either cancel the policy or renew it, in which case your premiums will most likely increase.
With the Social Security Administration predicting that current life expectancies are pushing closer to 90 and beyond, you may decide you want a life insurance policy that lasts longer than a temporary term. Typically, permanent life insurance combines a guaranteed death benefit with a savings portion that builds cash value, against which the policy owner can borrow funds or, in some instances, withdraw cash to help meet needs such as paying for a child's college education or covering medical expenses.
Cash value can be thought of as more like an investment, since it is dependent on interest rates. If the current interest rate is too low, you may find that your policy isn’t earning enough to cover all the costs that your premium doesn’t cover. In this instance, the insurance company will take their cost out of the cash value and you may see the value of your policy start to decline and lower the overall death benefit. This is why it’s important to have your financial advisor review your policy along with your other investments and discuss your options annually.
A third option is a life insurance and LTC hybrid policy. A common concern with traditional LTC coverage is that, despite paying a premium, you may never receive the benefits of LTC coverage if you never need LTC. With a hybrid policy, you are protected against never needing LTC and being out your premiums because you still receive a death benefit.
Life insurance will always be a difficult topic to discuss with your partner or financial advisor, but it’s important to protect your loved ones in the event of your passing. Each policy is unique to the individual, and discussing your options with an advisor can make sure you end up with a policy that covers your needs.
The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual.
This article contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, please contact your insurance agent. State insurance laws and insurance underwriting rules may affect available coverage and costs. Guarantees are based on the claims paying ability of the issuing company.
Jennie, a CERTIFIED FINANCIAL PLANNER™ professional, joined Wealth Enhancement Group in August 2009 and brings more than 16 years of experience to her role as Senior Vice President, Financial Advisor. Jennie is also a member of the Roundtable—the team of specialists and advisors who have distinct areas of expertise.