Life Insurance for Retirees
Life insurance for retirees - are you approaching retirement age and deciding whether or not to buy life insurance?
With the new year coming up so quickly, I have noticed that many people are trying to figure out their finances for the upcoming year. Surprisingly enough, many of the phone calls I have been receiving are from people who are 60 or older and approaching retirement. These particular clients commonly ask us, “Do I still need life insurance?”
Is Life Insurance Necessary for People Over 60?
Most people think that the answer to this would be an obvious, “No,” however, with people living longer and funeral expenses becoming more expensive, life insurance for retirees is becoming much more common.
Some of the reasons retirees decide to purchase life insurance include providing income replacement, leaving a legacy, preserving their estates from Probate, or to provide cash to pay off any outstanding debts. In addition, many retirees also purchase life insurance for pension maximization.
When Do You No Longer Need Life Insurance?
In general, as people age, they tend to reduce their need for life insurance. Overtime, our mortgage balance tends to decrease, our savings tend to increase, we become more responsible with our credit cards, and hopefully, our children become self-sufficient. With all that being said, unfortunately in 2008 after the market crashed, many people experienced a severe financial downturn and had a slower economic recovery than anticipated.
Over the last few years, however, a lot of us were forced to rely on credit cards and/or the equity in their homes to make ends meet. Due to these high-stress economic times, I have seen a rising trend of more people continuing to pay on their mortgages during their “retirement years.” As a result, life insurance for retirees to is becoming more common.
How Long Should I Have Life Insurance?
In most cases, a life insurance policy may be beneficial to provide coverage until your mortgage and debts are paid off and your children have moved out. Term life insurance policies are usually the least expensive and most favorable option because they provide protection for a set duration of time which is usually 10, 15, 20, 25, or 30 years. Term life insurance is not designed to protect you for your entire life or build a cash value, which is why it is so affordable.
Another reason why term life insurance may be beneficial for those who are working into their retirement, (even if it’s only part time), is because you can purchase affordable life insurance to bridge the gap to your planned retirement age. This is especially true if you have a spouse who is dependent on your income. The policy purchased can provide your spouse with a financial cushion if you were to pass away before reaching retirement or paying off the majority of your debt. If you feel like your need for coverage will end before your 80, select a term that will protect your income or financial goals until this planned life event(s).
In some situations, you may need to carry a large life insurance policy for the rest of your life. Depending on your need for the life insurance, buying term coverage may not be the best option. If you are purchasing life insurance to leave an inheritance, protect a child with special needs, pay off final expenses, or reduce estate taxes, a traditional 10, 20, or 30-year term life insurance policy is not a good choice.
Please keep in mind, a death benefit only pays out if you die before your term expires, and term life insurance policies typically do not continue coverage past the age of 80. People are living longer and longer and most Americans are now living past the age of 80. If you are purchasing life insurance to leave an inheritance, protect a child with special needs, pay off final expenses, or reduce estate taxes, we would instead recommend purchasing a permanent policy that you will not outlive.
What Type of Permanent Coverage Should I Buy?
Depending on your need for life insurance, you may want to consider a form of permanent life insurance. Whole life insurance and universal life insurance policies are the most popular even though they’re more expensive than term policies.
Based on your lifetime expectancy, or the longevity in your family, you can choose the length of the policy that best suits your needs. A permanent policy is more expensive because it is designed to payout a death benefit. Permanent life insurance should be purchased to leave an inheritance, reduce estate taxes, or to handle burial costs and final expenses. Purchasing term life insurance is more ideal if you want to replace lost income or secure debt, (like a mortgage), and is always highly dependent on how much your savings shortfall your expenses.
Do I Need to Create a Trust to Reduce Estate or Inheritance Taxes?
Permanent policies are designed to provide an influx of cash when you pass away. This money can be used to pay off the estate and inheritance taxes that are owed after your death. To avoid any unnecessary taxes, I often advise our clients to set up an irrevocable life insurance trust, or “ILIT,” if their assets exceed the federal tax exemption limits for the year. This provides the best solution for you to maintain some legal control over your life insurance policy while providing your heirs with liquid, tax free cash to pay off any expenses that are incurred after your death. By having cash available to pay off unexpected expenses, your heirs can avoid “fire sales” which means selling off any stocks, real estate, businesses, or jewelry at inopportune times.
Irrevocable life insurance trusts are a pretty complicated process but provide many benefits and they can save your family millions of dollars.
Can I Purchase a Policy to Leave an Inheritance for a Special Needs Child?
Retirees that are parents of children with special needs may also want to consider purchasing life insurance. If your child will need ongoing medical treatments or assisted living after you pass away, the death benefit from your life insurance policy can be used to provide an inheritance or fund a trust.
Upon your passing, the death benefit can be paid as a tax-free lump sum that is put into a trust for your child or it can be paid in installments directly to your child, a trusted relative, or trustee. A joint last-to-die life policy, may be ideal for these situations since they tend to be less expensive and do not pay out until both parents pass away. Once you purchase the policy, you can set up a trust to ensure that the money is used appropriately after you are gone.
Can I Purchase a Policy to Leave Money to a Charity?
If your spouse and children are already financially secure, some retirees will utilize a life insurance policy by leaving a donation to their favorite charity. In the long run, your insurance policy will probably provide more of a benefit to your charity than making the maximum annual donations each year for the rest of your life.
Many charities are actually recommending donors to give the gift of life insurance rather than making annual donations. If you have any questions about how these tax deductions work, we recommend speaking with your CPA.
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When it comes to keeping or buying a life insurance policy in your retirement years, the key thing to remember is that buying life insurance is not about you and never should be. The purpose of buying life insurance is to provide financial stability to your loved ones after you pass away.
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