Why Do I Need Life Insurance in My Estate Plan?

You’re not alone if you don’t fully understand the value and benefits that life insurance can give you as part of a retirement plan. Kiplinger’s recent article, “Don’t Overlook Advantages of Making Insurance Part of Your Retirement Plan,” says many folks view life insurance as a way to protect a family from the loss of income in the event a breadwinner passes away during his or her working years.

If that’s your primary purpose in buying a life insurance policy, it’s a solid one. However, that income-replacement function doesn’t have to stop in retirement.

When a spouse passes away during retirement, the surviving spouse may struggle financially. Some living expenses might be less when there’s just one person in a household, but the reduction in costs rarely makes up for the drop in income. One of the two Social Security checks the couple was getting goes away, and a pension payment may also be lost or reduced. Life insurance can be used to make certain there’s sufficient cash to compensate for that missing income. This lets the surviving spouse maintain his or her standard of living in retirement.

There are several sections of tax laws that give life insurance income tax and transfer tax benefits. For example, death benefits typically are paid income-tax-free to beneficiaries. Also, any benefits paid prior to the insured’s death because of chronic or terminal illness also are tax-free. This is called an accelerated death benefit (ADB) and is a relatively new option. If your insurance doesn’t have this coverage, it can probably be added as a rider.

Finally, cash values can grow within a permanent life insurance policy without being subject to income tax. Any cash values more than the policy owner’s tax basis can be borrowed income-tax-free as long as the policy stays in effect. If you were to pass away prior to paying back your policy loan, the loan balance plus interest accrued is deducted from the death benefit given to the beneficiaries. This may be an issue if your beneficiaries require the entire amount of the intended benefit. When the loan remains unpaid, the interest that accrues is added to the principal balance of the loan. If the loan balance increases above the amount of the cash value, your policy could lapse. That means you could you risk termination by the insurance carrier. If a policy lapses or is surrendered, the loan balance plus interest is considered taxable, and the taxes owed could be hefty based on the initial loan and interest accrued.

There are fees that can include sales charges, administrative expenses, and surrender charges. Those would be in addition to the cost of the insurance, which typically grows as you age.

Just because you’re retired doesn’t mean you won’t benefit from the protections life insurance can offer you and your family.

Reference: Kiplinger (July 10, 2019) “Don’t Overlook Advantages of Making Insurance Part of Your Retirement Plan”