Life Insurance in Retirement: Do I Still Need It?

Key Points – Life Insurance in Retirement: Do I Still Need It?

Reviewing Different Pension Options and Life Insurance Needs
Life Insurance in Retirement as a Wealth Transfer Vehicle
Using Life Insurance to Cover Long-Term Care Expenses
Paying Off Debt with Life Insurance
6 Minutes to Read | 23 Minutes to Watch

Things to Consider with Carrying Life Insurance into Retirement

Life insurance can be a key component in your financial plan, but it depends on your financial goals, lifestyle, and other circumstances. There are various reasons for why someone should purchase life insurance while they’re working, namely to provide for your loved ones if you pass away. But do you need life insurance in retirement? Well, it depends. We’re going to review a few reasons for why someone might want to carry life insurance into retirement.

Life Insurance in Retirement as a Risk Management Tool and as an Estate Enhancement Tool

It’s critical to understand that risk is real and that there are all different types of risk. Life insurance is typically thought of as a risk management tool, but it can also be an estate enhancement tool. Let’s tackle the risk management part of it first. The first thing that comes to Bud Kasper’s mind with life insurance in retirement is how to take care of his family when he’s gone.

“There are times early in our lives when we don’t have enough saved up so that if something happened. It could be devastating. The way we deal with that is with insurance.” – Bud Kasper

A lot of people think that when they’re retired that they’re suddenly self-insured. In some cases, that’s true. There are enough assets that if one spouse passes that the other spouse is going to be just fine. However, you must remember that if you’re retired, you and your spouse are either both on Social Security, both on Social Security and have a pension, or both have government pensions that minimize Social Security.

Life Insurance in Retirement If You Have a Pension

Bud and Dean Barber talked all about pensions on last week’s episode of America’s Wealth Management Show. In case you missed it, Dean and Bud discussed pensions and the differences between defined benefit and defined contribution plans. Here are some different claiming options for pensions.

Single life option: Pays a benefit if the person who claimed it is still living.
Joint-and-survivor options: Usually pay out a pre-determined percentage of the original monthly benefit to a designated beneficiary, such as a spouse.
Period-certain option: Pays out the benefit for the greater of the retiree’s lifetime or a pre-determined period of years.

Pension Maximization

There’s a process called pension maximization that we do with our CFP® Professionals, along with our CPAs. We determine what pension benefit makes the most sense and if adding life insurance as a pension maximization tool is a valid option for that individual? In some cases, it’s a staggering difference in what will happen if you use life insurance versus just using the pension.

Social Security is an example of a defined benefit plan. Let’s say that you and your spouse are both claiming Social Security and are taking as much as reasonably possible in a safe manner off your investments and that supports your lifestyles. Well, what happens when you or your spouse passes away? That smaller Social Security benefit goes away and the surviving spouse will be at the same income level and move to a higher tax bracket.

“That surviving spouse could suffer from an economic perspective for an unknown time. So, the question is, could you carry some life insurance into retirement? Could you prepay for that life insurance prior to retirement?” – Dean Barber

You need to run this through the planning process. Which one gives you the highest probability of success. Should you spend a little bit of money on life insurance every year—ensuring that if one spouse dies, the other spouse is going to be taken care of? Or do you have a higher probability of success not spending the money on life insurance and just taking my chances on the other side? You really need to weigh those two things out.

“It’s complicated. I don’t want to over insure myself because I want to have the money in my pocket to enjoy while I’m alive.” – Bud Kasper

Smallest Premium, Maximum Benefit

How do you pay as little as possible to get the benefit that you want? It’s about getting the smallest premium with the maximum benefit. Don’t fall for the old life insurance salesperson trick when they ask how much you can afford to put into it each month.

Life Insurance in Retirement to Cover Long-Term Care Costs

There’s another type of insurance in retirement that a lot of people think about more than life insurance. That’s long-term care insurance. Long-term care insurance has long been an option to cover those expenses, but it’s also quite pricey. Therefore, the life insurance industry has created a hybrid policy.

“When you look at the trends associated with long-term care costs, they only keep going up.” – Bud Kasper

An example of this could be a traditional life insurance policy with a premium payment and a death benefit. If the policy owner has long-term care expenses, the policy would begin to pay out the death benefit to cover them even before their death.

The favorite insurance that Dean likes to look at when it comes to long-term care is a life insurance policy that has a critical care rider on it. The reason he likes that is because life insurance is the only insurance that you or your estate will be getting more money out of the policy than you pay into it.

Bud actually has a life insurance policy with critical care rider on it. He was thinking about it from his plan’s perspective as a contingency. Bud wanted to make sure that if he goes into a long-term care facility that it won’t take away from the lifestyle of his wife, Peggy Kasper. He found a policy for $1 million with a death benefit associated with it. The policy allows Bud to go in while he’s still living and get as much as 65% of the death benefit that Peggy can access if Bud needs long-term care. Bud obviously hopes that won’t be the case, but it brings him comfort in knowing that.

Couples Financial Planning with Our Retirement Plan Checklist

Being on the same page about all things financial planning is critical. As you’re discussing life insurance in retirement with your spouse and figuring out if it’s a good option for your unique situation, check out our Retirement Plan Checklist. It consists of 30 yes-or-no questions to gauge your retirement readiness and and age-based timeline of things to consider as you’re approaching and going through retirement. Download your copy below!

Retirement Plan Checklist

Using Life Insurance to Convert from a Traditional IRA to a Roth IRA

One of Bud’s favorite reasons to keep life insurance in retirement is using it to convert from a traditional IRA to a Roth IRA. Remember that we explained earlier that when one spouse passes away, the surviving spouse is in a higher tax bracket. So, what if each spouse carried a life insurance policy on each other in an amount large enough to pay the taxes to convert all the IRA monies to Roth IRA at the death of the first spouse?

“That can work very nicely. The only thing that you need to take in consideration of the premium payments while you’re alive. Cash flow. If that works from that perspective, I’m all for that idea because the Roth is going to always come out tax-free.” – Bud Kasper

And when it goes to your beneficiaries, it’s also tax-free. They could get 10 years of compounded growth without Required Minimum Distributions. It’s a win-win all the way around. So, if cash flow allows for it, that can be a beautiful estate enhancement tool by allowing that individual to pass on money tax-free because they use the life insurance proceeds.

For example, let’s say you had a $500,000 policy and before you die, you pay $100,000 in premiums. Suddenly, you have $100,000 in premiums that paid $500,000 worth of taxes to convert a $1.5 million IRA to a Roth IRA. So, you pay $100,000 to get a $1.5 million IRA converted to a Roth IRA. It’s a great use of your money.

Keeping the Estate Tax Exemption in Mind

Something else to keep in mind when considering life insurance in retirement is the estate tax exemption. In 2023, the estate tax exclusion limit is $12.92 million if you’re single and $25.84 million if you’re married. And it’s been rising year after year.

However, that is set to change in 2026, as the Tax Cuts and Jobs Act is set to sunset, which would cut the estate tax exemption in half. That, in turn, could lead to ultra-wealthy individuals using life insurance in their estate planning to mitigate estate taxes.

Using Life Insurance in Retirement to Pay Off Debt

At any stage of life, life insurance can be very beneficial for income replacement. Life insurance can become even more crucial if you have outstanding debt in retirement. If you still haven’t paid off your mortgage or have other loans in retirement, life insurance can ensure that your beneficiaries will be able to pay off those debts if something were to happen to you.

Assessing If You Need Life Insurance in Retirement

So, do you think you still need life insurance in retirement? Like we said at the beginning of the article, it depends on your financial goals and lifestyle. Our team can help you assess if carrying life insurance into retirement is the best option for you. By clicking here, you can schedule a 20-minute “ask anything” session or complimentary consultation with one of our CFP® Professionals. The setting of that meeting can be in person, virtually, or by phone—whatever works best for you. We looked forward to seeing if life insurance is something that can be beneficial to you in retirement.

Life Insurance in Retirement: Do I Still Need It? | Watch Guide

00:00 – Introduction
01:41 – Life Insurance as a Planning Tool
02:29 – Life Insurance as a Risk Management Tool
05:55 – Making the Right Life Insurance Decisions
07:16 – TRIVIA – Biggest Life Insurance Policy Ever Written
09:10 – Pensions and Life Insurance
10:55 – Long-Term Care and Life Insurance
13:53 – Using Life Insurance for Roth Conversions?
15:52 – TRIVIA – Apollo Astronauts and Insurance Policies
17:00 – Stories on Life Insurance in Retirement
20:47 – What We Learned Today

Resources Mentioned in This Episode

Articles

Past Episodes

Downloads

Retirement Plan Checklist

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Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.