Good planning and diligent saving can help you from having to solely rely on Social Security benefits, which is often not enough to support you in retirement. There are many saving tools to consider, including life insurance.
Addressing financial concerns in your 30s and 40s can help prepare you for the future and boost your confidence in your ability to manage money and solving the retirement puzzle.
USA Today’s recent article, “Financial planning: How to determine if you need life insurance in retirement,” notes that many older Americans wonder if they’ll need life insurance in retirement. They are concerned whether their surviving spouse and loved ones will need the capital generated by the life insurance policy—the death benefit—to replace their income and to preserve assets.
The answer depends on the facts and circumstances. Some experts believe that if you planned well enough prior to retirement, you won’t need life insurance. You’ll have no debt, plenty of assets to replace the income lost due to your death, and sufficient money to leave to heirs. That all sounds good in theory, but reality may be different.
Run the numbers. Examine your projected cash flow statement before and after the death of either spouse. If there’s more than enough income to cover the surviving spouse’s living expenses throughout retirement, then you might not need life insurance. However, if there will not be enough income, even after you calculate the amount the couple has saved and whether that can reliably provide for the surviving spouse — then you might need life insurance as an income replacement for the surviving spouse, to pay off a large debt, like a mortgage or the replacement of assets for heirs, if you have use of all your funds for your needs.
It can also be used for estate taxes, taxes due on inherited IRA distributions or Roth accounts, or for charitable planning. A retiree with a large worth more than the individual estate tax credit might want their heirs to use life insurance proceeds to pay estate taxes and to avoid selling the bequeathed asset. These types of life insurance policies need to be in an irrevocable life insurance trust to keep its value out of your estate calculations.
Financing the life insurance premium on a fixed income is an issue.
You can use required minimum distributions (RMDs) from IRAs to finance life insurance that will provide a tax-free legacy to heirs. If you designate a non-profit organization as the eventual beneficiary of the retirement account, the IRA will no longer be included in your taxable estate. This strategy allows a retiree to eliminate the tax impact of their retirement account at their death, while eliminating income taxes on the retirement savings (this is only if you have a taxable estate).
In addition, with the possible need to fund long-term care expenses in retirement, retirees might consider buying a fully paid life insurance policy with a rider for long-term care.
Speak with your estate planning attorney to work through the numbers and make sure that any insurance policy you purchase, works as part of your estate plan.
Reference: USA Today (May 2, 2018) “Financial planning: How to determine if you need life insurance in retirement”