By Is it time to let my coverage go? Do I need more?
We’ve talked about life insurance a lot lately, as September is Life Insurance Awareness Month. We’ve covered topics for young single folks and growing families, so today we want to specifically address retirees.
Let’s assume that when you were in your 30s and 40s, you followed the advice of your financial planner and purchased a term life insurance policy. Perhaps your agent has contacted you about renewing your coverage, and you’re wondering, “Do I still need this?”
When clients call us with questions like this at this stage of life, we typically see three different scenarios. Some clients are well set and don’t need life insurance at this point. Others have increased their lifestyles without increasing their savings, and will need to maintain some type of coverage. The third group are those who have amassed sizable assets that they want to leave to either their children, church, alma mater or another beneficiary. In this case, converting from term life insurance to a permanent life insurance solution can help in a couple of ways.
If you’re in the first group, you bought term insurance to cover death within those 20 or 30 years of raising a family, so that your kids could still go to college, your family wouldn’t lose the house and your spouse could maintain his or her lifestyle. In addition, you wouldn’t have to fire the pool boy! But I digress. Now, the kids are done with school and you’re well on your way to $1 million in assets and an affordable mortgage or paid-off house. Many of these clients want to enjoy their hard-earned savings in retirement and aren’t concerned with leaving money to their children. If you’re lucky enough to bounce that last check at death, that’s success! For these clients, we typically say that they don’t need to renew their coverage.
Clients in the second group typically have done well with saving, but their lifestyles are such that they will need to have some protection in place. Maintaining life insurance coverage means your financial plan can automatically fund itself should something happen to you.
The third group of clients are those who have saved enough that outliving those savings is not a concern. Some of that money will be passed on after death, and there is no cookie cutter solution for people in this situation. First and foremost, if your estate is more than $10.6 million, then you’re facing different federal tax rules than those with smaller estates.
If you have a couple million in assets, it’s not as simple as just updating your beneficiaries (probably your children). You’ll want to consider what tax bracket your kids are in, as you don’t want to leave them a big tax burden to deal with after you’re gone. Talk to your financial planner and your CPA to see if there are ways to live off your highly appreciable assets. The goal for this group is to maximize their gifts – many clients prefer to leave their estates to churches, charities or alma maters instead of their children – while also maximizing your retirement lifestyle. This is where life insurance comes in. For these clients, we often look at using investment accounts that do not step up in basis now (think IRAs and annuities) while adding permanent life insurance as a way of leaving a final gift in a tax-efficient manner.
Wrapping up this month of talking about life insurance, you can see that each clients’ situation is different, and there are several options for using life insurance in creative financial ways. We’re here to help and answer all of your questions, so please, let us know what we can do for you.
Article by David Smyth, CLTC, Senior Partner at Family Financial Partners — a financial services firm in Lexington, Kentucky.
