Three Reasons for Retiree Life Insurance
As is probably well-understood, one of the most valuable benefits of life insurance is income replacement should the breadwinner(s) in a family unexpectedly pass away. For this reason alone, just about everyone supporting a family should have some amount and some type of life insurance during their working years. It’s less clear, however, whether or not there’s value in holding life insurance when you’re a retiree. After all, you no longer have an income to protect, so why pay for it? It turns out that there are certain situations in which life insurance can be valuable even in retirement. Briefly, here are three situations to consider.
- Estate taxes. After you and your spouse have both passed away, your estate will be distributed to non-spousal heirs. That is the point at which estate taxes may take a bite out of the amount of money to be distributed. Since 2012, when the concept of portability was introduced, the federal estate tax exclusion amount has effectively risen to over $10 million. At that level few estates will be subject to the federal tax, so most will not need to address this issue. They still may face state estate taxes, but there are none here in California. However, if your estate has the potential to be worth more than the exclusion amount when you die, and particularly if much of it is illiquid (e.g. comprised primarily of the assets of a family business or of owned rental properties), the trustee or executor may have a need for cash to pay the estate taxes in order to avoid having to sell the assets. This is where life insurance can help. An irrevocable life insurance trust (ILIT), properly worded, can help provide cash to cover the estate taxes without the life insurance benefits being considered part of the estate and consequently further raising those same taxes.
- Loss of pension. A pension in retirement is the closest thing to a paycheck. All pensions can be set up to provide lifetime income either to the ex-employee only or to the ex-employee and his/her spouse (called joint and survivor). When you choose the latter, you reduce the amount of income you get from the pension. An alternative is to take the higher-paying lifetime income for the ex-employee only and buy life insurance for the benefit of the spouse utilizing the incremental income to pay the premiums. In certain situations, that could turn out to be a cheaper alternative providing the same income than having purchased the joint and survivor option. But not in all cases. A thorough analysis by an unbiased financial planner or insurance professional is critical before considering such a strategy.
- Balancing a legacy. Suppose you have two children, one of whom has been active in your family business, and one who has followed a different path. After you die you wish for the former to take over the business, but you’re afraid that if you leave the business ownership equally split between the two, the result could be conflict between them regarding business strategy and operations. There have been many famous businesses that have all but collapsed after the founder passed away and the siblings that inherited it squabbled. The solution: instead of leaving the business equally to both children, you can leave it to the child who has been actively involved with it and utilize a life insurance policy to provide an equivalent legacy to the other child.
It’s important to recognize that to make any of these scenarios work you have to be insurable. If you have a medical condition that might limit your lifespan, you may not be able to purchase the life insurance. And the older you get, the less insurable you become. So if you want to follow one of the strategies above you need to decide at a relatively early age.
In summary, life insurance can be used for more than just income replacement. And there are other situations besides the ones mentioned above that might warrant the use of life insurance in your later years. But you should always get unbiased advice before deciding to utilize it when in retirement. (Full disclosure: Cognizant Wealth Advisors does not sell life insurance nor any insurance products.)