If you think you only need life insurance while you're young and working, think again. While income replacement and debt cancellation are the primary reasons people buy term life insurance when they are young, here are 7 reasons why you might want to consider owning permanent life insurance even after you retire:
1. Debt Cancellation - A Mortgage on your home, credit card balances, your childrens' school loans are just a few of the debts you may be dragging with you into retirement.
2. Long-Term Care - Many life insurance companies now offer Long-Term Care or Chronic Illness riders that can allow you to access some or all of the death benefit on your policy should Long-Term Care needs arise. Typically these riders are available on permanent life insurance policies such as a whole life or universal life policy. Note that any benefits used may reduce the death benefit available to your family when you die.
3. Taxes - Most Americans no longer need to fear the Federal Estate Tax. Based on Fedral tax law for 2017, a married couple that died the same year would not owe Estate Taxes until their assets exceeded $10.98 million. That figure could increase with the new tax legislation that takes effect in 2018. However, Estate or Inheritance taxes at the State level may still trap middle income Americans depending on your State's laws. Each State is different. Some conform to the Federal rules and some don't. You are encouraged to consult your legal or tax advisor for more information. Finally, assets such as your 401(k) or Traditional IRA may subject your beneficiaries to income tax at your death. If you have two children and they split your 401(k) 50/50 and that 401(k) is valued at $1million, each child would have to report $500k of income assuming they cash out their entire share immediately. Life insurance proceeds are generally free from income tax.
4. Income Replacement - Generally, both spouses are eligible for Social Security Benefits even if one spouse never worked. However, when the first spouse dies, the surviving spouse goes from two Social Security checks to one. The good news is that the surviving spouse keeps the larger of the two checks, but if your household depends on two incomes, this could be a problem. On top of that, many pensions pay out a reduced benefit (often 50%), if the owner of the pension is the first spouse to die.
5. Cash Value - Just as your home can build equity over time, so too can a permanent life insurance policy. The equity build up inside of a whole life or universal life policy is known as cash value. And, just like the equity in your home, you can borrow against the cash value of your life insurance policy for any reason. You also have the flexibility in many cases to set the repayment schedule and there is usually no credit check required. Two major caveats though. Failure to repay the loan could lapse the policy triggering adverse tax consequences. In addition, any outstanding loan balance is deducted from the death benefit your family receives at death.
6. Liquidity - Most of the Estate and Elder Law attorneys I know have great stories about children and relatives fighting over assets such as real estate, business interests, and other non-liquid assets after mom and dad die. Let's face it. Some assets don't split evenly. Life insurance can help equilize the inheritance. In addition, most life insurance proceeds can be paid in a matter of days while other assets like real estate, can take months or even years to sell.
7. Legacy - Suppose you wanted to leave $100,000 to your Alma Mater as a legacy. You could set aside $100,000 or, for cents on the dollar, you could purchase life insurance. This frees you up to use more of your retirement assets for their intended purpose; retirement.
There you have it; seven reasons why retirees need life insurance. As always, I strive to provide useful and accurate information. However, you should keep in mind that nothing contained in this blog post should be considered legal or tax advise. You are encouraged to consult your legal or tax professional.
About the author: David Iobst is a Certified Financial Planner™ based in Delaware with expertise in life insurance and estate planning. He is life insurance licensed in Delaware, Maryland, and Pennsylvania. If you are interested in scheduling a consultation, you can contact David via his web site www.davidiobst.com.