Many younger people never consider how life insurance could be important to them until it is time for retirement. We will explore how life insurance and retirement go hand in hand.
If retirement is on your horizon, consider the many uses of life insurance in your golden years.
When people buy their first life insurance policy, the goal is often straightforward: to help protect their beneficiaries from economic hardship if they were to pass away.
But as life goes on, income replacement may become less of an issue, and the use of life insurance can expand and change to address retirement-related goals. According to Marty Flewellen, chief distribution officer of Transamerica’s Life & Protection division, permanent life insurance can help to maximize retirement income for an insured or surviving spouse. Alternately, it can function as an efficient estate planning vehicle, transferring liquid assets to beneficiaries, generally tax-free.
The Sweet Spot: Age 50-55.
If you’ve recently joined the over-50 club, “Now is the perfect time to schedule a policy review with your insurance agent or financial advisor,” says Flewellen. “Fifty-five is the sweet spot, but when you look at the numbers and see how much people have saved for retirement, it’s clear they’re not getting around to it soon enough. I encourage people to review their retirement position anytime between 50-55, while there’s still time to make course corrections.”
“Also, for insurability purposes, physical impairments can increase after 50, and for some, life insurance can become less affordable. If you think you’ll need more insurance, it’s better to buy it sooner rather than later.”
What to Ask During a Policy Review.
In this age bracket, your existing life insurance coverage may consist of any number of policies — term life insurance, permanent life insurance, group or even executive compensation packages. Your insurance agent can assess your current coverage with an eye toward your future needs, and help you address your retirement and post-retirement concerns.
As a former insurance agent himself, Flewellen says he would start with two questions. “First, I would look at it from an income standpoint in pre-retirement. Have you accumulated enough wealth to replace income and keep your family in the world you want them to be in?” As part of this discussion, he suggests identifying any existing or upcoming coverage gaps, and looking at how to address any remaining needs.
“Second,” he says, “I would be looking at post-retirement need for income replacement. Will there be enough assets to keep you, and if applicable, your spouse, financially secure over both your lifetimes?”
It’s a good time to review any existing permanent policies intended to provide supplemental retirement income, to make sure they are still on track.
Flewellen also recommends exploring how a new permanent life insurance policy could help maximize retirement income. “Life insurance,” says Flewellen, “can play a very significant role in protecting against the risk of outliving your assets.”
For example, at retirement some people have a pension plan option to take a single life distribution in a higher amount, or a lower distribution that covers a surviving spouse as well.
“Life insurance death benefit proceeds can supplement retirement income for a surviving spouse in that scenario,” Flewellen explains. “You could opt for the higher, single-life pension amount, allowing both spouses to enjoy the higher amount together. After the first insured dies, the life insurance death benefit would be paid directly to the surviving spouse, providing the income that would have come from the survivor’s pension.
The key, says Flewellen, is that any new permanent life insurance coverage should be looked at for the death benefit, rather than cash accumulation potential. “Although permanent life insurance policies can be designed to provide supplemental retirement income, there must be sufficient cash value in the policy to do so — and that’s something that can often take decades to achieve,” he says.
A Lasting Legacy: Using Life Insurance for Estate Planning.
Once retirement income needs have been adequately addressed, consider the role life insurance can play in meeting estate tax obligations and passing wealth to heirs efficiently.
People with considerable wealth may have significant non-liquid assets, such as real estate holdings. Upon death, the liquid nature of a life insurance death benefit can prevent a forced sale of non-liquid assets to meet an estate’s tax obligations.
No matter your financial standing, life insurance proceeds are paid directly to your beneficiaries tax-free, avoiding the probate process to which even middle-class estates are subject.
“It’s those proceeds,” says Flewellen, “that can help beneficiaries directly, including grandchildren just getting started in life, adult children who may be struggling financially, even favorite charities.” And while death benefit proceeds are typically paid out in a single lump sum, Transamerica now offers its Income Replacement Option, or IPO rider. This rider allows the policyholder to structure the payout in a series of monthly payments, or a combination of lump sums and guaranteed monthly payments, creating an ongoing safety net for the policyholder’s beneficiaries.
“I think there are a lot of people in my generation who have done well, realizing their children are probably not going to have the same kind of financial success that we’ve had in our lifetimes,” says Flewellen. “Life insurance can help to create financial security for the next generation.”
The Importance of ‘Mission Control.’
Once you’re in retirement, Flewellen, along with many financial experts, advises annual financial checkups with your advisors, to ensure your plans remain on track. Flewellen likes to use the analogy of flying a rocket to the moon. “It’s actually on track 1% of the time — that’s why there’s mission control. They’re there to make adjustments, and keep as close as possible to plan. There are so many variables, even in people’s personal lives, that even the best-laid plans require mission control.”