Life Insurance for Retirement Purposes
Many people buy term insurance during their working years for income replacement or other reasons, often believing that they will not need insurance as they get older or during retirement. So, why would someone need coverage for an extended period of time? Contrary to popular belief (or disbelief), the need for life insurance often persists long after the kids have graduated college or the mortgage has been paid off. If you suffer a fatal heart attack the day after your youngest child graduates from college, your spouse will still be faced with daily living expenses. Without life insurance, would your spouse be able to maintain the lifestyle you worked so hard to achieve?
Let’s say you stick around for a long time after all the kids have graduated from college and you actually own the title to your home, here are some other reasons why you may want to have permanent life insurance.
When a person retires with a pension plan, he often chooses a reduced income option at retirement in order to provide a reduced amount of income to his spouse if he should die. A permanent life insurance policy – especially if purchased before retirement – may provide enough funds so the pensioner is comfortable taking a higher pension income knowing that the death benefit may help provide income for the surviving spouse. For the die-hard term insurance fans, you may still be able to use permanent insurance in this situation by selecting the higher pension option and using a portion of that money to pay premiums on a permanent life policy. Keep in mind, however, life insurance is less expensive when you buy it at a younger age. And for permanent insurance, the premium stays the same. There are other factors to consider as well such as your age, health, potential loss of medical benefits and the actual pension benefit.
Replacement of Social Security
One reason that people have permanent life insurance in retirement is to help offset the Social Security benefit lost when one spouse dies. A retired couple may be dependent on two Social Security checks. When one of them dies, the surviving spouse must choose between his/her social security check or the spouse’s check — causing a reduction in income. If a life insurance policy is in force, the death benefit proceeds may be used to help offset the lost Social Security check.
Supplement your Retirement Income
In addition to protecting your family, permanent life insurance can provide an ideal way to not only tax-diversify your retirement income, but supplement it as well with the cash value that accumulates on a tax-deferred basis. Most permanent life insurance contracts allow the policy holder to put additional money (above the premium) into the policy to further grow the death benefit and cash value. Policy owners can either withdraw (up to basis) or loan themselves money from the cash value.1 The money would be available on an income tax-free basis. Cash value life insurance is a smart way to supplement your Social Security, pension, 401(k) or other retirement income source.
Roth IRA Addition or Alternative
For those of you who contribute regularly to a Roth IRA, I’m sure there are times you wish you could contribute more than the $5,500 maximum.2 Who wouldn’t want to save as much money as possible every year, knowing you wouldn’t have to pay any taxes on the gain at distribution! Or what about those of you who make too much money! Single or Head of Household tax filers must earn less than $107,000 and Married Filing Jointly tax filers must earn less than $169,000 to fully contribute to a Roth IRA. Which makes more sense, take a pay cut to fund a Roth IRA or use permanent life insurance as a vehicle to accumulate money for retirement? Remember, the cash value in a permanent life policy grows tax-deferred and is tax-free at distribution.
Many couples may hesitate to use their assets as a retirement source because they want it to go to their children, grandchildren, or favorite charity. By having permanent life insurance policies in place at their deaths, a couple can leave a tax-free inheritance to their family or whomever they choose as a beneficiary. Why use your own money to leave behind an inheritance when you can use your life insurance company’s money? Since you know your family or charity is going to get your death benefit proceeds, you can actually use your assets in the present in whatever way you want.
Permanent life insurance isn’t just for the beneficiary or the survivors. It’s a powerful vehicle that can help you accomplish a variety of financial goals. Before you run out and buy large amounts of life insurance, make sure you take a holistic approach to your financial planning so that all the pieces of the puzzle fit together. If you have questions about life insurance or anything else related to insurance , contact our team. We’re here to help.
- Withdrawals and loans not paid back will reduce the cash value. The death benefit will also be decreased by any withdrawals or loans at the time of death.
- $6,500 for age 50 and above
by Andrew Reitano, CFP®, ChFC, CLU