A Security Net
The “average” person buys life insurance during their working years (i.e., age 25 to 65), either personally or through an employer. It is intended to cover certain financial obligations in the event of premature death. These obligations typically fall into one of the following categories:
- Income Replacement – A person’s income often plays an essential role in meeting the financial demands of a household. Term life insurance can provide a present-value lump sum to replace the future income of a deceased wage earner.
- Debt Reduction – When a person dies prematurely, they may leave behind a mortgage, student loans, unpaid credit cards and other outstanding debt. Term life insurance can help pay off debts so survivors aren’t responsible for these bills.
- College Education – Parents often plan to help with college expenses. A term life insurance policy can help with tuition in the event of a premature death.
Hang On or Let Go?
Ideally, when a person reaches normal retirement age (65), they have: 1) saved enough to replace their income for their survivors; 2) paid off their mortgage and any other debt; and 3) helped their children through college. They have outlived the contingencies they were insuring against and their nest egg is large enough to “self-insure.” For this “average” person, it makes sense to stop paying for term life insurance after retirement.
However, in my experience, not everyone fits this profile. Sometimes there is a need for life insurance after retirement. Consider the four scenarios below.
Melody and Mason — Endowing Expenses
As a young girl, Melody’s parents purchased a cabin in Colorado where they spent many weekends building lifelong memories. When her parents died, Melody inherited the cabin and her family began using it. Upon retirement, Melody and Mason updated their estate plans and learned the cabin was now worth up to $2 million! They wanted to pass the cabin on to their four children, but didn’t want them to be burdened by its annual expenses. They purchased permanent life insurance at age 65 to “endow” future operating costs and keep the cabin in the family.
Jake and Janice — Estate Equalization
At age 70, Jake and Janice moved from their farm to a small home in town. However, they wanted the farm to remain in the family. To entice their oldest son to return and run the farm, they promised to leave it to him. Although the farm was their primary asset, they still wanted to leave their other three children a generous inheritance. They bought life insurance policies for the benefit of their “non-farmer” children, which allowed them to “equalize” their inheritances.
Thomas and Toby — Estate Liquidity
At age 72, Thomas and Toby finally retired from their very successful business. Rather than sell, they hired a professional manager to run the business. Thomas and Toby planned to live off the dividends and then pass the business, in trust, to their five children. Between federal and state inheritance taxes, their estates could be taxed by up to 40% of the business’ value. Thomas and Toby purchased life insurance policies that would pay the estate taxes after their deaths. This would help protect the business and provide an income stream to their children.
Charlotte and Charles — Income Tax Differential
For 35 years, Charlotte and Charles owned a family clinic where they practiced medicine together. They retired at age 68. They have two children whom they want to treat “equally” when they pass away. Charlotte and Charles’ main assets include their medical practice building (valued at $2 million) and their IRAs (also valued at $2 million). They derive retirement income from rents and distributions from their IRAs. Their wills leave their building to their daughter and their IRAs to their son. Their accountant pointed out that the building would receive a “step-up” in basis and thus pass to their daughter essentially income-tax free. The IRAs, however, would not only be spent down, but also further reduced by about 40% through income taxes. Charlotte and Charles decided to purchase life insurance policies to offset the different income tax treatments of their willed assets.
Never Say Never
When listening to financial pundits on TV, radio or in advertising, remember they are almost always speaking to the “average” person. When they use absolutes such as “never” or “always,” it rarely applies to everyone. Your situation may be different and you might benefit from life insurance after retirement. The best way to know is to use an objective, independent financial planner who will analyze your specific situation. They can provide personalized recommendations to help reach your financial planning goals.
This article originally appeared in the 2019 | ISSUE TWO of the SilverLink magazine, under the title “Never Say Never: Life Insurance After Retirement.” Mark Weber is a Financial Consultant with SilverStone Asset Management, 401(k) & 403(b) Advisory services are offered through our affiliate company, SilverStone Asset Management. Visit SilverStoneAssetManagement.com.
Securities offered through M Holdings Securities, Inc., a Registered Broker/Dealer, Member FINRA/SIPC. Investment Advisory Services offered through SilverStone Asset Management. SilverStone Asset Management and SilverStone Group are independently owned and are not under common ownership with M Holdings Securities, Inc.
This information is provided for educational purposes only and should not be construed as advice. You should discuss your situation with a financial professional before making any decisions.
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