Why Would Retirees Need
Senior Life Insurance?
As you approach or begin retirement there is much to look forward
to for you and your spouse. The easing of stressful work, relaxation
time, and enjoyment of things long put off may come to mind. Insuring
for replacing your income for children, their education, and upbringing
are gone. And life expectancy statistics put many years ahead of you
to enjoy.
But, unfortunately, these statistics also imply that some will die early
with a probability that increases faster after age 55. If so, will a
premature and unexpected death of you or your spouse leave the other
financially strapped for rest of her (or his) life? Senior life insurance
may be the solution
Beyond insuring for you and your spouse’s legacy to your children
and final estate costs, there are five reasons to have senior life insurance
ensuring your spouse that relaxing retirement that you are in the processes
of creating. You may consider more life insurance for these reasons:
- To cover an adult child that is now evidently having a hard time
in life: This may be due to a mental or physical disability or a
shortcoming that has appeared in his adult life.
- To cover the Social Security blackout period for your spouse: Social
Security pays nothing from when the youngest child leaves high school
until the surviving spouse applies for benefits, based on the deceased
spouse’s record (minimum age for eligibility is 60). You anticipated
qualifying for a certain amount of social security benefits as part
of your retirement income but there will be no help during this “blackout
period.” Senior life insurance is the answer if you pass.
- To offset reduced benefits you anticipated from Social Security
and saving plans. As the main breadwinner with some high income years
still left you plan to contribute heavily to qualified plans you are
in. These years may also boost your social security benefits too. Your
early death will preclude that extra retirement income you thought
these savings and social security benefits would produce.
- To supply your commitments that relied on two incomes: Perhaps both
spouses work in your family. You may have committed to mortgages, loans,
or other obligations that depended on both your incomes. You need to
insure that at least the deceased spouse’s income is replaced
to allow the surviving spouse to maintain those commitments.
- Senior life insurance creates an emergency fund to handle both the
first spouse’s death expenses and other unforeseen expenses that
may come up in subsequent years.
Senior life insurance will not only allow the surviving spouse to enjoy
at least the income and asset benefits you anticipated for both of you,
but also support the legacy that you both wanted to leave to your children
and charity.
Liquidity When You Need It
You want to leave the family house to your three children. But
how will that work? If they each have families, they certainly
can’t share it. And will one have the funds to buy the others
out? Once you realize that leaving illiquid assets to more than
one child can create more grief than benefit, you want to have a simple
solution. And that’s one of the many uses of senior life
insurance—to provide a pool of liquidity to transfer illiquid assets.
Let’s say the family home is worth $1 million. Of your three children,
one or more may want cash more than the house. So you purchase
a million dollar senior life insurance policy owned by a trust that you
establish. At your passing, the trust gets the million dollars from the
policy. That trust has your instructions for disbursement of the
million dollars. Perhaps you want it to go to the child that does
not own a home so he has the funds to purchase the home from his siblings. Perhaps
you want the proceeds to be split three ways and then the highest bidder
uses the cash as a down payment and gets a loan to pay off his siblings. Any
arrangement you can imagine can be specific in the trust.
You can specify anything you think is fair but the most important aspect
is that the insurance provides the liquidity to make several alternatives
possible. Without the million dollars of cash, you could have
three arguing children and potentially create a life long rift in their
relationship. The life policy provides liquidity and flexibility
for many possible solutions.
The same approach can be used for passing along a family business, investment
real estate, art or any other illiquid asset.
What about the need for liquidity prior to death? Many policies now
provide an accelerated death benefit if terminal illness strikes. The
following occurrences could trigger an accelerated death benefit:
- Diagnosis of a terminal illness or physical condition for which
death is likely to occur within a specified amount of time.
- Occurrence of one of a number of specified medical conditions ("dread
diseases" or catastrophic illnesses) that would result in a drastically
limited life span without extensive or extraordinary medical treatment.
- The need for extended long term care in a nursing facility, at home,
or in the community due to an inability to perform daily activities,
including one or more of the following: eating, toileting, transferring,
bathing, dressing, and continence.
- Permanent confinement to a nursing home.
The flexibility of senior life insurance to provide liquidity for many
of life’s events is not widely appreciated. If you have
concerns about the future and extra liquidity would help, please check
off on the coupon or call the office and we will explore with you ways
you can get the liquidity you desire.
Stretch Your Pension Plan to Two Lives—Another use of Senior
Life Insurance
It’s common to find two spouses and one has
a pension that stops when the pension recipient dies. Yet both
spouses rely on that pension income for their living needs. Here’s
a simple and easy solution that makes economic sense and saves financial
hardship for the surviving spouse. The inexpensive way to protect against
financial hardship is to own term life insurance to replace the pension
income.
Earlier this year, I obtained a $100,000 policy for a 70-year-old male
for a premium less than $200 monthly (20 year level term). Of
his $1,200 monthly pension, we used less than $200 to pay the premium
and slightly reduced their household spendable income. But here’s
what we gained.
If he predeceases his wife (women statistically outlive men by 7 years),
his wife will receive this $100,000 tax free from the insurance policy. Assuming
she is age 80 at the time he passes, the $100,000 invested for income
in a life annuity, gives her $1000 monthly of income to offset the loss
of his pension (most of the monthly payment is tax free). Alternatively,
she could invest in a fixed income investment at a hypothetical 6%, enjoy
$500 monthly and dip into principal when and if needed. In this
scenario, there are potentially funds remaining for her heirs.
How much does your household income change if either spouse passes away
and a pension or social security check disappears? Now may be
the time to make an inexpensive financial commitment to guard against
financial hardship for the surviving spouse.
It’s easy to have us develop a scenario and see if the economics
are in your favor to stretch payments over 2 lives.
Life Insurance as Part of Your Income Plan
Most of us purchased life insurance when we were young and had a mortgage,
and perhaps children, to protect, but it turns out that life insurance
can also be a tremendously useful asset for retirees as well. Here
are some of the things you can do with life insurance.
Tax-Free Income
Do you have a whole or universal life policy that you’ve had for
years that has a large cash value? If you do, you have an extra
source of income that you may be able to access free of taxes, and that
won’t cause your Social Security benefits to be taxed.
You can withdraw cash from your policy up to your cost basis free of
income taxes. You can borrow (usually up to a limit set by your
contract) from the policy at low, or possibly even zero, interest (again
depends on the terms of your contract).
In most cases, you won’t have to pay it back.
There is a catch however, if you have withdrawn money above your cost
basis, it could be subject to income taxes if your policy lapses, thus
you need to work with your advisor to insure that this doesn’t
happen and that your policy remains in force throughout your life. Keep
in mind that your death benefit will be reduced by the amount of your
withdrawals (plus any interest due on loans).
Another bonus, if the policy is owned by another family member (other
than your spouse), or a trust, any remaining death benefit will pass
to your heirs free of both income and estate taxes.
Supplementing or Replacing Your Pension
If you are about to receive a pension, you may be able to choose to
have your payments set up to pay until your death, or to pay until both
you and your spouse have passed. If you elect a payment schedule
to last until the second partner dies, your payment will be lower than
if it is based on your lifetime alone.
However if payments stop when you pass, and you die first, your spouse
may be left without a needed source of income. One way to replace
that income is through senior life insurance.
If you die first, the death benefit replaces your pension.
If you die last, you will have received the larger pension payment throughout
your lifetime, and your other heirs will receive the death benefit.
Combining LTC With Life Insurance
Most of us fear becoming dependent on our children and/or wiping out
our financial resources if we become seriously ill and need extended,
long-term care. This is a very real concern as Medicare doesn’t
cover most forms of extended care, and there are income and asset limits
to be eligible for Medicaid. Add to this that you probably want
the best care possible, and not be limited to a less expensive, Medicaid
facility.
However, long-term care insurance (LTC) can be expensive, and like all
insurance, if you don’t use it, you lose it. However, the
insurance industry has come up with new products that combine senior life insurance with long term care insurance. These combination policies offer all the
same options as stand-alone LTC insurance, but if you don’t use
up your LTC benefit, there is still a death benefit that will pass to
your heirs free of income taxes. In either case, you should
get back far more in benefits than the premium paid.
A less expensive option is to add a rider to your life insurance policy
that will accelerate the death benefit in case of terminal or serious
illness. In this case, you spend your death benefit before you
die.
Protecting Retirement Accounts From Tax Erosion
You’ve likely worked hard for that large, six or seven figure
IRA or 401(k) you have accumulated, and smart investing, combined with
tax-deferred growth helped it grow, and should do so well into the future. As
long as you are alive that money will continue to grow tax-deferred and
only that which you withdraw will be subject to income taxes.
The problem is that when you die, your money will be subject to income
taxation, and if your estate is large enough, estate taxation. Combined
those two forms of taxation can eat away up to 80 percent of the amount
over the current estate tax exemption ($3.5 million in 2009).
One way to avoid the estate tax problem, and continue tax-deferred growth
is to pass it on to your spouse who can roll it into his or her own IRA
without any immediate tax consequence. However, this does not preserve
your estate tax exemption, and upon the death of your spouse, the balance
of your account will be considered part of his or her estate.
Another way to delay income taxation, though it might not protect your
account from estate taxes is to set up a stretch IRA.
A better way to protect your large retirement account from going to
the IRS would be to establish a life insurance trust that can then purchase
an insurance policy that will more than make up for any taxes that will
have to be paid on your retirement account. You can use money from
other assets if you have it, or pay taxes on the money you withdraw from
the account to buy the policy, but either way the cost to do this should
be far less than the potential tax bill.
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