Do I Need Life Insurance?
For just coming out of September and life insurance awareness month I thought I’d take some time and talk about the question, “Do I need life insurance in my retirement plan?”
There is not a one-size-fits-all answer. As with a lot of things, the answer depends on your overall plan.
Let’s talk about some of the living benefits of life insurance today and when you could use them.
Oftentimes when we say “Life Insurance” people often hear “Death Insurance,” meaning that they think the only time that they’re going to get the benefit of Life Insurance is if they die.
Of course, the death benefit is one benefit of life insurance and probably the idea of life insurance in its truest form. If something happens to you, then there’s money for your family.
This is especially important with younger people raising kids or one partner having a higher income. Making sure that you have a good amount of life insurance, or “death insurance,” in the event one of them were to predecease the other, is always important to make sure that the kids are taken care of and the bills will be paid.
Different Types of Life Insurance
So, we understand the basics of life insurance by that one definition, but there are some other living benefits with life insurance that are often overlooked.
Now, I want to start off by saying that not all life insurance policies are created equal. There are different ways to design policies for different reasons.
You have probably heard of some of the main types of life insurance, like term insurance, which is kind of like renting a house. You’re paying for a death benefit for a certain period of time but not accumulating any equity or cash value.
Term insurance is the cheapest form of insurance when it comes to just trying to provide for the family if something happens.
There’s also whole life insurance, which grows over time and also builds up some cash value.
Then there’s universal or index universal life (IUL) insurance, which can have a lot more flexibility with what happens.
Index Universal Life Insurance is the type of policy that we’re going to discuss the most today in the living benefits area.
Let’s start with a few of the living benefits you can utilize.
Tax-Free Benefits of Life Insurance
One would be saving for retirement or creating retirement income from an IUL Policy. You could use an IUL policy for accumulating and then creating tax-free income in retirement if you design the plan the right way. You could save for a grand grandchild using an IUL. You could also look at it for leveraging long-term care benefits so that if you ever need care for assisted living, home care, or a nursing home, you could utilize the life insurance death benefit.
Let’s start off by talking about living benefits and creating retirement income. This can really be a two-fold strategy.
If you’re younger and you’re trying to figure out how you’re saving for retirement, whether you’re 5 years away or you’re 35 years away it’s always good to look at the different options and vehicles available.
One of our great partners is an actuary, Martin Ruby, and he wrote a book on this topic called, The New Rules of Retirement Savings. In that book, he talks about using life insurance as a tool for saving for retirement, highlighting a couple of key factors.
One is index-based growth without market risk.
Two is tax-free growth with more access to the money and being able to take it out without penalties before the age of 591/2 or without any or government restrictions.
Also just the ability to have that death benefit as well. I always say if you live too soon or die too long you have that policy that helps.
So if you’re saving for retirement, we actually have a sample chapter that you can download and take a look at.
The flip side of Martin Ruby’s plan is that as he went through everything he thought, well this is great for people who are saving for retirement but what about me? I already have millions in my IRA, it’s all going to be taxable when I retire, and I’m probably not going to be at a lower tax bracket, so what do I do?
This is a case where he’ll use life insurance as a raw alternative.
The book No Compromise Retirement talks about utilizing this. He has created some great tools that we often use to create personal reports regarding the tax consequences inside your IRA.
If you hold that and just take out your minimum distributions, which is what a lot of people do, how much in taxes are you going to pay in your lifetime? How much more will we be paid later?
Most people end up finding that the number on the lifetime tax on that IRA is surprisingly high. Sometimes it can be as much as half or more of the value of your current IRA.
This means that if you have half a million dollars in your IRA, then the lifetime taxes could be as high as $250,000.
Running those reports is a great way to see what the lifetime taxes might be and then figure out how to adjust it. It’s not an all-or-nothing where we take everything and we move it and pay all the taxes and put it in IUL. That’s not even an option.
However, there are some great tools that will allow us to do some over time and reduce the lifetime tax.
So, the living benefits of being able to create tax-free retirement income can apply whether you’re saving or if you have already saved, but you’re transitioned some of your taxable retirement income to an IUL.
Since we are often asked by our clients about this, I want to briefly talk about saving for grandkids.
We’re asked, “How do I put money away?” “Could I use a 529 College Plan?” They’re just saying that they want something they can put away but have flexibility.
So the advantage of using life insurance for saving for kids is that it can be used for college, but it could also be used for something less traditional like buying a car, a house, or something in the future.
Life insurance is flexible and can be used that way. However, if they are going to college, it doesn’t count against them on their financial aid reports. So there are some tools and ways to be able to use that.
There are also some things to consider like the parents have to have life insurance for the kids to get it, but it is a tool that I use for my boys.
As soon as we finished their adoptions we started a life insurance policy for them. So, know that’s an option for you.
The last living benefit I want to talk about is long-term care. People will ask about long-term care insurance because they have a certain form and all these assets, but I do not want it all to be spent on nursing care, so they look at long-term care.
However, the problem with traditional long-term care, especially for most people, is that $5-$10,000 a year is spent on the premium and that’s for coverage for just a short period of time, three years, maybe five years, depending on how old you are, depending on when you get it, etc.
It just seems like a lot of money to spend if you don’t use it.
Now we could argue the chances of you being in some type of care, whether it’s home care or nursing care, is high, but it still seems like a lot.
What we will look at in place of long-term care is a life insurance policy that has a living benefit rider. This is where you can access the death benefit for long-term care.
We sometimes call this the win-win-win.
It is a win in the meaning that if you need that money back most often there is a return of premium or other liquidity options.
This means that you can take the money back if you need it for something else. You could decide that you’re just sick of this weather and want to buy a house in Florida. You have the option to take that money and use it.
The second “win” is if you don’t end up needing long-term care and don’t spend any money on it, then you wouldn’t have lost the money set aside for that. Instead, that money will be a death benefit and go to your beneficiaries tax-free.
Then, if you do end up needing long-term care you can access the death benefit as a living benefit.
I know that I went more in-depth today that I normally do, but this is just a topic that has so much information available to you about ways that you can go about taking care of your life insurance and your family.
The most important thing to learn from this article is whether you need life insurance or not and where it fits depends on your overall plan.
So, if you’re not sure where to start I would suggest going through the Four Steps of Creating Your Dream Retirement video course that we have on our website. It will walk you through some of the things that you need to do to make sure that you have in place before you figure out where or if life insurance fits.
If you have questions on anything we talked about specifically or would like to see one of the reports I mentioned, then make sure you schedule a call and we’ll get that report to you.
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