Five ways life insurance can help you in retirement - MarketWatch
Editor’s note: The author of this column is chief executive of life insurance provider.
As retirement draws near, it’s only natural to look at your life insurance coverage and wonder whether any changes should be made. After all, you might have first purchased life insurance half a lifetime ago. Back then, it offered a great way to safeguard your income during your prime working years, particularly if you had young children to raise or decades of future mortgage payments to consider.
By the time you reach your 60s, your children are likely grown and your mortgage is at least close to being paid off. If you executed a sensible long-term savings plan, perhaps you also have a healthy amount of money set aside for retirement. Under such circumstances, do you still need life insurance?
Some people don’t believe so, and choose to either not renew term coverage as they approach retirement or surrender permanent coverage at retirement. But there are valid reasons why it makes sense to maintain life insurance coverage throughout retirement as part of your long-term financial plan.
Some examples of how life insurance can offer advantages in retirement include:
1. Wealth transfer to heirs: Life insurance is one of the most effective methods for creating an orderly succession of assets to future generations and establishing a legacy via charitable bequests. The income-tax-free (and possibly estate-tax-free, if properly constructed) nature of life insurance death benefits adds to its efficiency as a wealth transfer vehicle. Life insurance also provides a way for families to equalize estates among their children, particularly when illiquid assets, such as a family business, are involved. For heirs who do not expect to be involved in the business after their parents’ death, life insurance offers the ability to receive a cash amount equivalent to the value of a business being passed onto other heirs.
2. Access to cash: If you believe the same level of coverage will no longer be needed, you can access the cash value of a permanent life insurance policy to help fund your retirement. In exercising this option, you would pay premiums into the policy during your working years, then leverage it as a source of retirement income (via withdrawals and/or policy loans utilizing the life insurance policy cash value) along with your 401(k) plan, Social Security benefits and other assets.
3. Support for a widow/widower: Perhaps you want to ensure that a surviving spouse is able to pay certain expenses after one of you passes away. These could include funeral costs, an existing mortgage or any other type of debt. Accounting for such possibilities can help you better enjoy retirement, knowing that life insurance death benefits offer expense coverage that would prevent the surviving spouse from being put in a difficult financial situation.
4. Protection from the onset of chronic illnesses: Many life insurance policies allow people to access the death benefits for chronic illness before death. Chronic illness is legally defined as either cognitive impairment (e.g., Alzheimer’s disease) or the inability to perform two out of six activities of daily living. While you wouldn’t necessarily need to be hospitalized to receive the money, annual certification from a medical professional is required.
5. Charitable giving: Life insurance can be used in several ways to support an individual’s charitable giving strategy as retirement approaches. For example, you could make a gift of an existing life insurance policy to a charity. In addition, the policy beneficiary can be changed to a charity. Finally, the presence of life insurance enables a donor to make a gift of real estate, investments or other forms of property to a charity while continuing to provide a reasonable inheritance to heirs. This is known as a “wealth-replacement” use of life insurance in charitable planning.
An ounce of prevention
With all the potential benefits life insurance coverage can offer during retirement, it’s important to remember the significant cost benefit of having a policy leading into your golden years. If you dropped coverage before retirement and then decide as a retiree that you again want a policy, the coverage would almost certainly be more expensive due to your increased age. Additionally, any health issues you might have developed during the intervening time period could prevent you from being underwritten at the same rate class, if at all.
Maintaining coverage into retirement can provide you with priceless peace of mind, thanks to advantages that include enjoying an alternative source of income, executing tax-advantaged wealth transfers, donating to a charity whose mission you support, protecting a surviving spouse, or receiving relief from the high costs associated with chronic illness.
Ray Caucci is the chairman and CEO of Vantis Life Insurance Company, a life insurance provider for midmarket and emerging affluent consumers. He is also a fellow of the Society of Actuaries, a member of the American Academy of Actuaries, and chairman of the Pennsylvania Life & Health Insurance Guaranty Association Board of Directors.
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