As you approach retirement age and begin developing your retirement income strategy, many components must be considered. One aspect that is often overlooked is incorporating life insurance into the retirementplanning process. Though life insurance is commonly associated with younger families needing financial protection, there are several reasons why maintaining an active life insurance policy can be very beneficial for retirees as well. In this blog, we’ll explore the advantages of parking life insurance and retirement strategies.
The primary historical purpose of life insurance is to replace income and provide financial security for dependents when the insured person passes away. This remains an important function during retirement years. Even if you have diligently saved for retirement over the years, losing one spouse’s income stream and savings can put the surviving spouse in a difficult position financially. Maintaining a life insurance death benefit helps replace the income lost when you pass away, allowing your surviving dependents to preserve financial stability.
The amount of life insurance coverage needed certainly declines from the levels required during your working years when dependents relied more heavily on your income. But preserving some level of death benefit coverage on your life, or on both spouses, can prevent severe financial distress for the surviving widow or widower later in retirement. For example, a $100,000 policy could provide funds to help your spouse maintain mortgage payments, healthcare premiums, and monthly bills to sustain their needs and lifestyle.
In addition to the death benefit, certain types of life insurance also allow you to accumulate cash value that you can access during retirement to help supplement income from Social Security, pensions, retirement savings, and investments.
Permanent life insurance policies like Whole Life and Universal Life have premium structures designed to build cash value in the policy over time. This cash value earns interest at rates generally better than certificates of deposit. Policies then enable you to take loans or even withdrawals from that cash value, essentially borrowing against yourself rather than paying interest to a bank. This can help retirees smoothly fill income gaps when markets are down or supplement monthly income to help cover new costs like medical bills or home health care expenses as you age.
When structured with an optimized premium schedule, a permanent life insurance policy can be designed to enable loans and withdrawals from the cash value to be completely income tax-free throughout retirement. This tax treatment means you can receive income equivalent to a 6-7% fully taxable source.
Additionally, the death benefit, cash value, and premium structure inherent in permanent life insurance policies can also be utilized to create guaranteed income streams through annuities. Some life insurance carriers allow clients to essentially exchange the cash value for an annuity that provides set monthly payments for life, establishing an income floor to cover essential retirement living costs.
Life insurance can also be an important part of planning for the financial future of any special needs family dependents you may have. Whether you have a special needs child, sibling, or other family member who relies on your care and financial assistance, life insurance can help ensure resources remain available for their continued care and quality of life when you pass away.
Suppose there will be people still financially depending on you even after retirement. In that case, life insurance is beneficial to designate funds from the death benefit to be professionally managed and used specifically for that dependent’s needs throughout their life. Every personal financial situation is different, so consulting a financial advisor is important to appropriately incorporate special needs planning and determine suitable life insurance policy structures. However, protecting special needs, dependents can certainly drive life insurance product selection and death benefit amounts for retirees.
You have unique retirement dreams and deserve a customized plan that helps you achieve them. Hobart utilizes a comprehensive approach to build a holistic financial strategy. Learn more about our process today.
If you determine that maintaining life insurance aligns well with your overall retirement income goals and needs, there are a few additional factors to evaluate as you assess policy options:
The main types of life insurance policies available are term and permanent life insurance:
- Term Life Insurance: This option provides an affordable death benefit for a defined period of time, such as 10 to 30 years. It only pays if you die during the term. There is no cash value accumulation built within these pure death benefit policies.
- Permanent Life Insurance: This option covers you for your entire life, whenever you pass away, as long as the premiums are paid. It also accumulates cash value, as noted above. The premiums and death benefit structure for the different permanent life insurance policy types can provide varied options to align with income, wealth transfer, and planning goals.
A licensed life insurance agent can illustrate various product solutions depending on your specific financial needs and which approach works well for your situation. However, given the cash value component, permanent life insurance policies tend to be better equipped for retirement planning purposes.
If you’ve maintained term life insurance, evaluating conversion to a permanent life insurance product 5 to 10 years before retirement usually makes sense since term policies expire without cash value. Timing is also important because permanent policies get more expensive to obtain as you get older. Medical changes can reduce or eliminate eligibility for life insurance in later years. This is why obtaining at least some permanent cash value coverage while still healthy enough to qualify, even if 5+ years from retiring, can be wise planning.
As you assess life insurance product options through different insurance carriers, be sure to evaluate each company’s financial strength rating from firms like A.M. Best or Standard & Poor’s. These ratings assess the financial health of insurers based on balance sheet strength, operating performance, profitability metrics, and business profile indicators. Given the long-term promises inherent in life insurance contracts, you want to deal with carriers that are financially equipped to deliver.
Here are some key strategies to consider during your financial planning for retirement:
- Start early: The sooner you begin saving, the longer your money has to grow. Compound interest can result in profound long-term benefits.
- Maximize your contributions: Fund your retirement account to the maximum limit, if possible. If your employer provides matching contributions, try to reach at least that minimum amount.
- Diversify your portfolio: Diversification helps balance risk and reward by spreading your investments across various financial instruments, categories, or market sectors.
- Decide on a retirement plan: Whether it’s a 401(k), Roth IRA, or traditional IRA, choose a retirement plan that best suits your needs and goals. A finance writer, financial professional, or financial advisor can help you make an informed decision.
Securing the financial future of yourself and your loved ones requires the help of an expert financial planner. The Hobart Wealth team takes pride in working closely with our clients to build a holistic plan that meets their needs. Contact us today to learn more about our life insurance and retirement solutions.
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Hobart Wealth is a DBA of Hobart Private Capital, LLC. Investment advisory services offered through Hobart Private Capital, LLC, an SEC-Registered Investment Advisor. Insurance services offered separately through Hobart Insurance Services, LLC, an affiliated insurance agency. Hobart Private Capital and its affiliates are not certified tax or legal advisors. Any reduction in taxes would depend on your specific tax situation. You are advised to seek the advice of a qualified tax or legal professional for such matters. This information is intended for educational purposes only. It is not intended to provide any investment advice or provide the basis for any investment decisions. Investing in securities involves risk, including potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Please see Item 8 of our ADV 2A Brochure for additional information on the risks associated with our services. By submitting your contact information, you consent to be contacted in the future regarding retirement income strategies that utilize insurance and investment products. Any references to protection of benefits, safety, security, or steady and reliable income refer only to fixed insurance products. They do not refer, in any way, to securities or investment products. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company, and may be subject to fees, surrender charges, and holding periods which vary by insurance company. Insurance products are not FDIC insured. Our firm provides links to third party articles to assist users in locating information on topics that might be of interest to them. Linking to an article or web site does not constitute a representation of the services offered by our firm nor does it constitute an endorsement by the Firm of the sponsors of the site or the products presented on the site. Please consult your tax, legal, and/or financial advisor prior to making any decisions regarding these third-party articles. Hobart Wealth is not affiliated with the U.S. government or a governmental agency. No information contained within was approved by, endorsed by, or authorized by the Social Security Administration.