Traditionally, life insurance is purchased during your working years to replace your income for your family in case you die. But if you’re retired, do you still need senior life insurance? Maybe.
Three Reasons to Own Senior Life Insurance
1. Many couples are dependent upon two social security checks or two pension checks for their retirement expenses. When one spouse passes away, the other spouse finds that the income falls yet many of the expenses and lifestyle requirements remain. The inexpensive way to protect against this scenario is to own term senior life insurance.
Recently, I obtained a $100,000 policy for a 70-year-old male for a premium of $200 monthly. If he predeceases his wife (women statistically outlive men by 7 years), his wife will receive this $100,000. Invested for income at 5% (a hypothetical rate), this would produce $5,000 annually of income. This will offset the loss of his social security check. If used up over her lifetime, (assumed to be another 7 years), the principal plus interest would generate over $15,000 annually for the wife.
2. Some people maintain senior life insurance for estate planning reasons. Let's say you've developed your net worth by owning real property. One son takes an active interest and manages most of your property. The other son lives 2,000 miles away. He travels around the globe as an archeologist and has no interest in the properties. You want to leave the properties to the son who cares for them. But you are concerned what to leave the other son. Easy answer. Buy life insurance and name the archeologist as the beneficiary. The life insurance policy should be equal to the value of the properties so each son gets an equal amount.
If your estate is over $5.45 million, the excess is subject to estate taxes at hefty rates. A simple, often inexpensive way to pay the tax without taking money from the beneficiaries is to have a life insurance policy to pay the tax.
3. To make the most of your IRA or retirement plan. Say you are age 70 and it’s time to start taking mandatory distributions from your IRA. Let’s assume the distributions are a hypothetical $15,000 annually. If you invested those distributions at a hypothetical 8% (5.2% net after combined taxes of 35%), you would accumulate $190,439. Take the same $15,000 and buy senior life insurance and upon death your heirs get $1.25 million. That's a lot more than the $190, 439 you would accumulate. You can do the same if you have a qualified retirement plan but the numbers are even better as you can purchase the policy inside the plan with pre-tax dollars.
By the way, don't be concerned about health. For estate purposes, senior life insurance can be written on a spouse or any relative about your same age. An insurance agent can explain that.
How to Turn a Life Policy You No Longer Need into Cash or Income
These are some very powerful ways to use a policy you already own. Or you can get a new policy to achieve financial goals for your family.
Now assume you have a life insurance policy and have no reason to keep it. You have several choices to turn it into cash or into income:
• You can withdraw your basis in the policy free of tax. The basis is the amount of premiums you paid less any withdrawals you have made. This would still maintain the policy but get your cash out.
• You can take a policy loan. Loans are not generally taxable because they are an advance of the death benefit.
(Remember that taking cash from your policy will reduce or eliminate your death benefit.)
You could also sell your policy for cash to a third party but we discuss this in a separate post. You can sell a cash value policy and potentially, even a term policy in which has no cash value.
You may want to terminate it all together. Most cash-value policies offer three non-forfeiture options if you want to terminate your policy before maturity:
1. You can receive the policy's cash surrender value in a lump sum, or
2. You can use the lapsed policy to continue to provide death protection at the net rate for term insurance, or
3. You can buy a paid-up term or cash-value policy for a reduced face amount using part of the cash surrender value of the policy and keep the rest for your use.
You really need to talk with an agent to go through these options if you have a policy you no longer need.