Though life insurance is typically thought of as a product for young families, the fact is that for retirees, this product can be important and an extra sense of security, especially when you travel. Cash at death is not just needed to pay taxes, but also to assure a surviving spouse’s well-being, leave a legacy for your family or charity, and achieve related estate planning goals. And with the recent pandemic, it’s no surprise sales of life insurance have been up in the last two years.
If you already have life insurance, congratulations. And if you’re wondering what to do with your policy once you retire, here are some of my ideas.
If you don’t have life insurance, it’s now an easier process to obtain a policy. A combination of improved technology and the mandatory isolation caused by the pandemic has led to insurance companies streamlining their online processes.
Pro Tip: If you can’t meet live with an agent and/or want to avoid having blood drawn, know that there are alternatives.
Top Reasons You Need Life Insurance In Retirement
1. Spousal Support
Most of us have 401ks and IRAs, not defined benefit pension plans. That means we have a pot of money at retirement, not an ongoing income for life. Particularly if you’re married, life insurance may be needed to provide an income to your surviving spouse when you’re gone. Say Dick and Jane are married, and Dick dies 3 years after retiring. Jane’s living expenses are very unlikely to be reduced by half just because of Dick’s death, yet some of her income may leave when he does.
Let’s say, both Dick and Jane are receiving Social Security. When Dick dies, Jane only gets one Social Security benefit — the higher of the two received while married. Jane will also be in a higher tax bracket because, after the year of Dick’s death, she loses the advantage of using married filing joint rates. Add to this the concerns about Social Security’s safety and rising Medicare costs, and Jane realizes it’s important to have additional cash. And for these reasons, income tax-free life insurance on Dick’s life seems like a good idea.
2. Legacy Planning
Like many retirees, you may wish to leave a legacy upon your passing. Research shows that if you want to provide a financial gift to your children or a charity at death, the use of a life insurance death benefit is an effective technique. With an insurance policy, you have a known benefit that will be paid upon your death, and consequently, you can feel more comfortable withdrawing monthly retirement income from your savings.
You don’t know when you will die, but you do know that your beneficiaries will get a specific, tax-free death benefit. That means you can enjoy your retirement savings while alive and not worry about whether you have left a legacy.
Need To Know: The SECURE Act
The life insurance-as-a-legacy strategy has become even more popular since the passage of the SECURE Act in 2018. Beneficiaries used to be able to stretch out the payments — and the taxes — from inherited qualified plans and IRAs. The so-called “stretch IRA” was largely taken away by the SECURE Act. For example, now if you leave a $500 thousand IRA to your adult daughter, she will have to draw down all of that IRA within 10 years following your death. And that means more income tax for her than if she had stretched out the payments. The better approach is for you to draw down your IRAs during your lifetime and leave tax-free life insurance to your daughter at death.
3. Death-Related Expenses
Whether you’re retired or working, dying is expensive. Probate fees, relocation costs for your surviving spouse, taxes — all of these expenses are triggered with death. Given the liquidity of life insurance, death benefit survivors won’t have to dig into their savings to cover these costs. The math is simple: Life insurance pays for the expenses of death so that there’s ongoing retirement income for the living.
Applying For Life Insurance Is Easier Now Than Ever; Here’s Why
A Simplified Process
Traditionally, the process of buying life insurance was cumbersome. You would travel to an agent’s office, complete a lengthy paper application, have a paramedic draw your blood, and then wait for weeks to have your policy delivered. When COVID-19 hit, this process was not only a hassle but an impossibility. Live meetings stopped, but the need for life insurance didn’t. Fortunately, the life insurance industry has responded. Much — or even all — of the process of applying for life insurance can be accomplished online.
Having a knowledgeable insurance agent still makes sense for many individuals, but the process of working with an agent has been streamlined. More and more, there are ways to
- meet remotely
- complete paperwork online
- avoid the physical intrusion of having a paramedical exam
- and encounter a much shorter wait for your policy to be issued.
This New Tool
A key element in this process is insurance companies’ use of predictive analytics. Simply stated, insurers can get a good feel for what kind of mortality risk you represent without necessarily drawing your blood. They ask you some basic medical questions, and if your answers don’t raise too many red flags, they proceed to the next step. With your consent, they will check a number of databases such as pharmaceutical, driving, and medical bureaus. In many cases, the insurance companies feel this information provides them with enough data to issue a policy without needing to analyze your blood.
To be clear, these policies are not the guaranteed-acceptance life insurance plans you see on TV. Those products are understandably limited in benefits and comparatively costly. The products underwritten through predictive analytics are the retail products that in the past could only be obtained by providing a blood sample and waiting for a physician’s statement.
Depending on your age, some companies are able to issue a death benefit as high as $1 million. And, even if there is a concern raised by the information they obtain through predictive analytics, some insurers will allow you to continue your application for coverage by providing a blood sample.
Other Important Life Insurance Considerations
Life insurance isn’t like fire insurance. Insured property may never burn, but an insured individual will eventually die. This is why life insurance becomes more expensive to buy as we age; we’re that much closer to experiencing a claim. That doesn’t mean you can’t buy life insurance at older ages. Life insurance companies recognize there is a market for older age insurance, and they’re more than interested in providing products for this market.
If you think you’ll need life insurance in retirement, the sooner you start the process, the better. Whether you’re a DIY person or someone who wants advice, get a handle on determining your needs before you start shopping for quotes. How much death benefit should you have to pay the costs of death and leave a legacy?
Part of the process should include determining how you’ll pay the ongoing premium while in retirement. In some cases, an effective technique is to draw down IRA balances to fund the purchase. In others, it’s a better tax play to use after-tax money. Another consideration is what kind of insurance to buy — term, universal life, or whole life. While some forms of life insurance are commoditized, most policies require careful examination. A good agent can help greatly in sorting through needs and solutions. It’s not just a matter of price.
Don’t assume you’ll have to run the gauntlet to buy a policy. Companies are rapidly moving toward hassle-free applications, and some even offer real-time, immediate acceptance for healthy applicants. The paper chase of the 20th century is moving toward a 21st-century app solution. You should decide how much insurance you need, what kind you need, and the best way to pay for the coverage. Don’t let the fear of paperwork and delays be an excuse for inaction.
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