Why Would Retirees Need Senior Life Insurance?
Why have senior life insurance if you are close to retirement or retired?
As you approach or begin retirement there is much to look forward to for you and your spouse. The easing of stressful work, relaxation time, and enjoyment of things long put off may come to mind. Insuring for replacing your income for children, their education, and upbringing are gone. And life expectancy statistics put many years ahead of you to enjoy. At age 65, men are expected on average, to live to age 82 and women to age 85. And the older you get, the longer your life expectancy.
>But, unfortunately, these statistics also imply that some will die early with a probability that increases faster after age 55. If so, will a premature and unexpected death of you or your spouse leave the other financially strapped for rest of her (or his) life? Senior life insurance may be the solution.
Beyond insuring for you and your spouse’s legacy to your children and final estate costs, there are five reasons to have senior life insurance ensuring your spouse that relaxing retirement that you are in the processes of creating. You may consider more life insurance for several reasons.
Six Top Reasons to Own Senior Life Insurance
- To cover an adult child that is now evidently having a hard time in life: This may be due to a mental or physical disability or a shortcoming that has appeared in his adult life. Given the seniors will pass before the child, funding care for the future is critical.
- To cover the Social Security blackout period for your spouse: Social Security pays nothing from when the youngest child leaves high school until the surviving spouse applies for benefits, based on the deceased spouse’s record (minimum age for eligibility is 60). You anticipated qualifying for a certain amount of social security benefits as part of your retirement income but there will be no help during this “blackout period.” Senior life insurance is the answer if you pass.
- To offset reduced benefits you anticipated from Social Security and saving plans. As the main breadwinner with some high-income years still left, you plan to contribute heavily to qualified plans you are in. These years may also boost your social security benefits too. Your early death will preclude that extra retirement income you thought these savings and social security benefits would produce.
- To supply your commitments that relied on two incomes: Perhaps both spouses work in your family. You may have committed to mortgages, loans, or other obligations that depended on both your incomes. You need to insure that at least the deceased spouse’s income is replaced to allow the surviving spouse to maintain those commitments.
- Senior life insurance creates an emergency fund to handle both the first spouse’s death expenses and other unforeseen expenses that may come up in subsequent years.
- To treat heirs equally
Senior life insurance will not only allow the surviving spouse to enjoy at least the income and asset benefits you anticipated for both of you, but also support the legacy that you both want to leave to your children and charity.
Senior Life Insurance Provides Liquidity When You Need It
You want to leave the family house to your three children. But how will that work? If they each have families, they certainly can’t share it. And will one have the funds to buy the others out? Once you realize that leaving illiquid assets to more than one child can create more grief than benefit, you want to have a simple solution. And that’s one of the many uses of senior life insurance—to provide a pool of liquidity to transfer illiquid assets.
Let’s say the family home is worth $1 million. Of your three children, one or more may want cash more than the house. (And NEVER leave an indivisible asset to more than one person). So you purchase a million dollar senior life insurance policy owned by a trust that you establish. At your passing, the trust gets the million dollars from the policy. That trust has your instructions for disbursement of the million dollars. Perhaps you want it to go to the child that does not own a home so he has the funds to purchase the home from his siblings. Perhaps you want the proceeds to be split three ways and then the highest bidder uses the cash as a down payment and gets a loan to pay off his siblings. Any arrangement you can imagine can be specific in the trust.
You can specify anything you think is fair but the most important aspect is that the senior life insurance provides the liquidity to make several alternatives possible. Without the million dollars of cash, you could have three arguing children and potentially create a lifetime rift in their relationship. The senior life policy provides liquidity and flexibility for many possible solutions.
The same approach can be used for passing along a family business, investment real estate, art or any other illiquid asset.
What about the need for liquidity prior to death? Many policies now provide seniors an accelerated death benefit if terminal illness strikes. The following occurrences could trigger an accelerated death benefit:
- Diagnosis of a terminal illness or physical condition for which death is likely to occur within a specified amount of time.
- Occurrence of a number of specified medical conditions ("dread diseases" or catastrophic illnesses) that would result in a drastically limited life span without extensive or extraordinary medical treatment.
- The need for extended long-term care in a nursing facility, at home, or in the community due to an inability to perform daily activities, including one or more of the following: eating, toileting, transferring, bathing, dressing, and continence.
- Permanent confinement to a nursing home.
The flexibility of senior life insurance to provide liquidity for many of life’s events is not widely appreciated. If you have concerns about the future and extra liquidity would help, please find an agent that is educated in insurance for seniors. Note only will an experienced agent compare quotes from several companies, he can recommend the company that has policies more favorable to seniors. A professional will not only compare the quote from one compare and another but also compare the benefits you get for each quote. (Please do not consider senior life insurance advertised on television. They offer guaranteed acceptance from a company like Colonial Penn, AARP, Metlife or Mass Mutual). These "TV policies" are noncompetitively priced and do not offer the coverage amounts or benefits they should).
Another use of Senior Life Insurance - Stretch Your Pension Plan to Two Lives
Today, it’s common to find two spouses and one has a pension that stops when the pension recipient dies. Yet both spouses rely on that pension income for their living needs. Here’s a simple and easy solution that makes economic sense and saves financial hardship for the surviving spouse. The inexpensive way to protect against financial hardship is to own term life insurance to replace the pension income. And suprisingly, term insurance offers affordable rates even for those you might consider elderly.
Earlier this year, I obtained a $100,000 policy for a 70-year-old male for a premium less than $200 monthly (20-year level term). Of his $1,200 monthly pension, we used less than $200 to pay the premium and slightly reduced their household spendable income. But here’s what we gained.
If he predeceases his wife (women statistically outlive men by 7 years), his wife will receive this $100,000 tax-free from the insurance policy. Assuming she is age 80 at the time he passes, the $100,000 invested for income in a life annuity, gives her $1000 monthly of income to offset the loss of his pension (most of the monthly payment is tax-free). Alternatively, she could invest in a fixed income investment at a hypothetical 6%, enjoy $500 monthly and dip into principal when and if needed. In this scenario, there are potentially funds remaining for her heirs.
How much does your household income change if either spouse passes away and a pension or social security check disappears? Now may be the time to make an inexpensive financial commitment to guard against financial hardship for the surviving spouse.
It’s easy to develop a scenario and see if the economics are in your favor to stretch payments over 2 lives.
Senior Life Insurance as Part of Your Income Plan
Most of us purchased life insurance when we were young and had a mortgage, and perhaps children, to protect, but it turns out that life insurance can also be a tremendously useful asset for retirees as well. Once the protection use ends, there are other uses. Here are some of the things you can do with life insurance.
Do you have a whole or universal life policy that you’ve had for years that has a large cash value? If you do, you have an extra source of income that you may be able to access free of taxes, and that won’t cause your Social Security benefits to be taxed.
You can withdraw cash from your policy up to your cost basis free of income taxes. You can borrow (usually up to a limit set by your contract) from the policy at low, or possibly even zero, interest (again depends on the terms of your contract). In most cases, you won’t have to pay it back.
There is a catch however, if you have withdrawn money above your cost basis, it could be subject to income taxes if your policy lapses, thus you need to work with your advisor to insure that this doesn’t happen and that your policy remains in force throughout your life. Keep in mind that your death benefit will be reduced by the amount of your withdrawals (plus any interest due on loans).
Another bonus, if the policy is owned by another family member (other than your spouse), or a trust, any remaining death benefit will pass to your heirs free of both income and estate taxes.
Supplementing or Replacing Your Pension
If you are about to receive a pension, you may be able to choose to have your payments set up to pay until your death, or to pay until both you and your spouse have passed. If you elect a payment schedule to last until the second partner dies, your payment will be lower than if it is based on your lifetime alone.
However, if payments stop when you pass, and you die first, your spouse may be left without a needed source of income. One way to replace that income is through senior life insurance. If you die first, the death benefit replaces your pension. If you die last, you will have received the larger pension payment throughout your lifetime, and your other heirs will receive the death benefit.
Combining LTC With Life Insurance
Most of us fear becoming dependent on our children and/or wiping out our financial resources if we become seriously ill and need extended, long-term care. This is a very real concern as Medicare doesn’t cover most forms of extended care, and there are income and asset limits to be eligible for Medicaid. Add to this that you probably want the best care possible, and not be limited to a less expensive, Medicaid facility.
However, long-term care insurance (LTC) can be expensive, and like all insurance, if you don’t use it, you lose it. However, the insurance industry has come up with new products that combine senior life insurance with long term care insurance. These combination policies offer all the same options as stand-alone LTC insurance, but if you don’t use up your LTC benefit, there is still a death benefit that will pass to your heirs free of income taxes. In either case, you should get back far more in benefits than the premium paid.
A less expensive option is to add a rider to your life insurance policy that will accelerate the death benefit in case of terminal or serious illness. In this case, you spend your death benefit before you die.
Protecting Retirement Accounts From Tax Erosion
You’ve likely worked hard for that large, six or seven figure IRA or 401(k) you have accumulated, and smart investing, combined with tax-deferred growth helped it grow, and should do so well into the future. As long as you are alive that money will continue to grow tax-deferred and only that which you withdraw will be subject to income taxes.
The problem is that when you die, your money will be subject to income taxation, and if your estate is large enough, estate taxation. Combined those two forms of taxation can eat away up to 80 percent of the amount over the current estate tax exemption ($5.45 million in 2016).
One way to avoid the estate tax problem, and continue tax-deferred growth is to pass it on to your spouse who can roll it into his or her own IRA without any immediate tax consequence. However, this does not preserve your estate tax exemption, and upon the death of your spouse, the balance of your account will be considered part of his or her estate.
Another way to delay income taxation, though it might not protect your account from estate taxes is to set up a stretch IRA.
A better way to protect your large retirement account from going to the IRS would be to establish a life insurance trust that can then purchase an insurance policy that will more than make up for any taxes that will have to be paid on your retirement account. You can use money from other assets if you have it, or pay taxes on the money you withdraw from the account to buy the policy, but either way the cost to do this should be far less than the potential tax bill.