Life Insurance — Not Just for Protection
By Todd Holden, Financial Advisor
When we think of life insurance, we think of a younger person with a family to protect. Typically, we think of somebody with children to raise and a mortgage to pay. The insurance buyer wants to make certain their spouse and children are not forced to leave their home or change their lifestyle drastically in the event of an unexpected death.
Because we like to think of life insurance as a four-letter word, we tend to overlook what an effective tool life insurance can be for retirees. A few situations in which life insurance may be beneficial to retirees are below.
Investment Alternative — Many retirees have money sitting around, and they get to a stage of life where they want low-risk alternatives. Life insurance can be an effective use of this money. When someone says, “This money is for the kids,” they should examine life insurance as a low-risk option. For example, one company allows a healthy 70-year-old man to turn $100,000 of premium into a tax-free death benefit of $201,399. This same insurance contract can provide a death benefit of $226,954 for a healthy female. Please note that underwriting is required for these types of contracts.
Charitable Giving — Many retirees wish to leave money to charity but do not want to disinherit their children. These same retirees are being forced to take money out of their retirement accounts (TSP, IRAs, 401(k)s) through required minimum distributions (RMDs) that they don’t need to meet their living expenses. These RMD funds can be used to purchase life insurance. The beauty of this is that the remainder of the retirement account can be left to charity which won’t pay taxes while the life insurance is left to children who will not owe taxes on the death benefit. Congress, with more than a little help from the life insurance lobby, has blessed life insurance death benefits with tax-free status.
IRA Replacement — We are beginning to see more and more retirement accounts worth over a million dollars. Prior to 2020, many retirees were planning to pass these large accounts to their children with the idea that the children could use them as a pension in their retirement through a “Stretch IRA.” The Secure Act did away with this. Now, any IRA that is inherited by an adult child needs to be liquidated within 10 years of the parent’s death. This means that a 55-year-old who inherits mom or dad’s IRA has to empty their account (and pay taxes on it) by the time they’re 65. If mom or dad really wants to provide a retirement for their child, one idea would be to make larger IRA withdrawals, purchase life insurance and let the adult child use the death benefit to enhance their retirement. If the parents are concerned about the child spending the life insurance proceeds, they can establish a trust to provide for their child.
Some of these concepts seem complicated. They can be. They can be incredibly worthwhile too. Over my career, I’ve noticed that many retirees evolve. When they are newly retired, they want to keep their hands on all their money. Then, sometime in their 70s they realize, “I’m never going to spend all this.” At that point their thinking evolves to “what is the best thing to do for my family.” As one client said, “I don’t always like what my kids do with money, but I’d rather give it to them than the IRS.” For assistance with your life insurance needs, contact me at email@example.com or visit my website rtholden.nwfllc.com to schedule a consultation.