Life Insurance & Retirement: Your Options and Next Steps
As adults, we’ve been told over and over again to make sure we have enough life insurance should the unthinkable happen. And if you’ve followed this advice, I congratulate you. Unfortunately, not everyone does.
However, as hard as it is to believe, there could come a time when you don’t actually need life insurance – or at least not the coverage you’ve always carried.
What you must remember is, as strange as it may sound, life insurance is not bought to insure your life. After all, your life is priceless, and no amount of money would be enough to insure it. What life insurance is intended to insure is the financial loss, or hardship, that someone would experience should your life end. Most of the time the primary loss being insured is the loss of income. That means once retired, if income sources remain stable regardless of whether you walk this earth or not, then the need for life insurance may no longer exist.
Reaching Retirement Milestones
If you’re one of those people questioning whether or not you still need coverage, this could be an exciting yet emotionally charged time for you. While many of us assume that every step toward retirement is a happy one, there are still adjustments to be made. Realizing that you might not need life insurance probably means that your kids have grown and you’re no longer responsible for everyone’s welfare as you once were.
While I’m still in the category of needing life insurance with two kids at home, my parents have changed their coverage over time, choosing to invest in a permanent policy that gave my mom a sense of security. (This worked well for them and their retirement income, but it’s not for everyone.)
C. Beach Brown clients have also experienced this transition. For many, the economics of the policies – specifically the premium costs – are the deciding factors. While our goal as parents is to raise our kids to be ultimately independent, we still want to make sure that they are okay even as adults. Life insurance is our way of doing so. But the reality is that in most cases the kids ARE okay. In fact, I work with many children of my clients who actually are worth more than their parents (although I can’t disclose this to them). The pattern that I have noticed through the years is that responsible parents tend to have responsible children. They’ve trained them to be that way. It’s a leap of faith, but one that needs to be taken.
The good news is that you now have some options. Let’s take a look.
If you have a permanent policy, you can take the cash value and either cash out or roll it to an annuity. There are tax consequences to this, so be sure to consult your tax advisor. Also, depending on the policy, you can actually sell it to investment groups who will give you cash for it. This usually only works if you have a life expectancy on the shorter side due to illness or age and is not appropriate for all policies. You will need to work with an insurance professional to determine if it is the right option for you.
Let it Lapse
If you’re someone who has paid into a policy for years, it can be hard to let it go – but you have to look at your situation today and decide what is the best possible decision moving forward based on the facts surrounding your current life – not the you of twenty years ago.
Making the Decision
Deciding what to do with your life insurance is completely dependent on the type you have. Permanent policies like whole life, universal life, and variable universal life, have tax consequences when you cancel them if you are receiving cash value or if you have an outstanding loan.
This is why it is important that, before you make any decisions, you work with your advisor. I had a client who ended up owing $10,000 in taxes after surrendering a policy (I was not his advisor at the time). He had a loan against the policy and did not realize that in surrendering the policy he could be potentially creating a taxable event. He also didn’t realize that he would need to provide the cost basis to his accountant the following year when it came time to do his taxes.
Bottom line: when in doubt, call a professional for a second opinion.
Your Next Step
As we go through the stages of life, we save money for our kids’ college, we pay off the house, we put away a big enough nest egg to retire. Once this happens, the focus shifts from “what if I die to what if I live?”
Remember, life insurance replaces an income. Figure out what you need to cover your family and work your way backwards. Eventually, the wise thing to do could be to transition from a life insurance policy to long-term care insurance. This becomes the bigger need as annual bills north of $100,000 for living expenses can quickly decimate your life savings.
And as you move through this transitional time, remember to celebrate this milestone. You’ve spent years taking care of everyone else. Now it’s time to enjoy yourself and reap the rewards of all those years of financial responsibility!