Our Financial Planner Said We Didn’t Need Our Life Insurance When We Retired…Then My Husband Died
In a recent article in Kiplinger Personal Finance, author Evan T. Beach, CFP® AWMA® provides his perspective and answer to the question, If You’re Retired, Do You Still Need Life Insurance?
Evan does a nice job at saying “it depends”, gives us the math and then tells the story of a gentleman, who had $5MM of assets and no liabilities, who dropped “a significant amount” of life insurance. The gentleman later developed cancer and passed away. He states:
I have never known a death to be timely…
There is no mention as to whether the dropped insurance was term insurance or permanent and no reference to his age or general health. It is a sad story for sure and one that might have ended differently had there been a little more information and discovery than just an “on paper” decision.
I can hear the conversation and it probably goes something like this …
“You have $5MM of assets [assume qualified plans, real estate, non-qualified investments], no liabilities and with your Social Security benefits and investment accounts we can generate $X in income for both you and your spouse for the rest of your lives, assuming a “safe” 4% distribution rate. Our Montecarlo analysis shows a 90+% probability that you will never run out of money, and you should be able to leave a legacy to your children and grandchildren with the remaining assets. You don’t need life insurance so let’s drop it and reinvest the premium savings into your investment portfolio or use it for lifestyle spending”.
Evan’s own words are:
As I consider my own retirement and legacy objectives (now that I am 62 and my children are in their 30s), I ask myself a lot of questions, as I am trained to do. However, many people may not think about all the scenarios, and most of them involve some level of risk outside of just the investment performance and sequence of return (Montecarlo simulation) risk. The risk of dying too soon, the risk of living too long, the risk of getting sick along the way and the inevitable risk of transfer taxes.
Consider the following questions when contemplating the use of permanent life insurance during retirement:
1. Is 4% of your income generating assets enough for you to live the life you want to live? Could you take more income at the risk of leaving less to your children\ grandchildren?
2. If you have a legacy objective (because NOT everyone does), could you spend more and replace the inheritance with life insurance? Permanent life insurance could be your permission slip to spend more during your life while having your children receive 100% liquid cash that is income tax free and uncorrelated to any other asset class. Life insurance does not care if “the market” (any market) is down 20% the day you pass away – the value of life insurance is always 100% of what you expect it to be.
3. Could you reduce the sequence-of-return risk during retirement with guaranteed lifetime income annuities? A life annuity will never run out of money. It is, by definition, a longevity hedge, but it will cease to pay upon your (and\or your spouse’s) death. Could you replace those annuity assets with life insurance?
4. In what order are you going to spend down assets? Qualified plans and annuity assets will be taxed to your children as ordinary income when they inherit the funds. Have you considered the reality that the IRS is a 40% beneficiary of those assets? Maybe more if you have a large estate and would owe estate taxes. How does that impact the value of your legacy assets? Could you use permanent life insurance to cover the taxes on this liability or possibly allow them to convert to a Roth IRA and have the insurance proceeds pay for the taxes on the conversion?
5. Do you have any charitable intentions? You could designate a charity, or a donor advised fund (DAF), as the contingent beneficiary of your qualified plans and annuities while replacing the assets to your children with tax free life insurance.
6. How much do you like those not so cute 35-year-old children? Do THEY have kids? Do you like THEM? I’ll bet you do. How much do you want to leave them? Could you use life insurance for that?
7. Are there any special needs or disabled grandchildren? Do you want to help your children with them?
8. What if you got sick and required home health care or nursing home care? Is that scenario built into the Montecarlo analysis? How will an illness impact your retirement income or your legacy assets if you draw them down to pay for care? Did you know that you could add a long-term care rider to a life insurance policy? Could life insurance proceeds replenish assets expended on elder care?
9. What about life insurance cash value? How does that play into your tax planning? Did you know that cash value grows free from income taxes? Did you know that distributions from life insurance during retirement could be taken income tax free if structured properly? Did you know that you could borrow from your policies at a very low cost to no cost. Imagine having your own bank where you could borrow money for that trip to Italy.
10. Did you know that if you really needed or wanted to, you could possibly sell your life insurance for a cash payment?
I could go on and on about why permanent life insurance has a place in your portfolio during retirement but don’t take it from me. Ernst and Young conducted a very thorough study and analysis entitled Benefits of Integrating Insurance Products Into a Retirement Plan. Their conclusion was that “permanent life insurance and deferred income annuities with increasing income potential outperform investment-only approaches in our analysis.”
The full report is available for free at https://www.ey.com/en_us/insurance/how-life-insurers-can-provide-differentiated-retirement-benefits or you can email us at marketing@agencyone.net and we will send you a copy.
Mr. Beach – I am sorry. You make some good points but your article was ultimately a promotion to do a needs analysis with your firm. While I applaud your theory and agree that this should be a deliberate and thoughtful consideration, the right answer lies in asking the right questions.
Please contact AgencyONE’s Marketing Department at 301.803.7500 for more information or to discuss a case.
