When Life Insurance Makes Perfect Financial Sense in RetirementSubmitted by Concierge Financial Planning, LLC on June 5th, 2017
When most people think about life insurance, it is something to be purchased when we’re young with financial responsibilities and dependents to protect. Any discussion about purchasing life insurance after we retire is often met with strong opinions as to whether or not it makes any financial sense. After all, the cost of life insurance increases significantly over the age of 65. While that may be true, the unique properties of permanent life insurance, such as guaranteed cash value growth, tax-free death benefits and tax-free access to the cash value, make it one of the best possible solutions in certain circumstances.
When You Want to Maximize Your Estate
For the moment, the government still wants to get its hands on a portion of your estate. If your estate is worth more than $5.49 million in 2017, it could be subject to estate taxes up to 40% of the value of your estate. For many people with large estates that could force the sale of a family farm, business or other valuable assets to settle the tax bill. Life insurance provides the liquidity estates need to cover settlement costs. When owned inside of an irrevocable life insurance trust (ILIT), the death benefit proceeds are not includable in the estate for tax purpose. It would be important to work with an estate planning specialist who can determine the most appropriate arrangement and amount.
When You Want to Increase Your Legacy
Many people own permanent life insurance because it is a cost effective way to maximize a financial legacy. One of the more popular strategies is centered on the Individual Retirement Account (IRA). Retirees with sufficient assets to cover their income needs may not need to access their IRA funds. In fact, many have identified their IRA as a legacy asset to be passed onto their children. However, they the Required Minimum Distribution rule requires that they begin withdrawing their funds by age 70 ½ which will diminish the value of the asset.
The life insurance strategy seeks to turn the IRA into a tax-advantaged legacy by using the required distributions to purchase a life insurance policy. After paying taxes on the distributions, they are used to pay the premium. At death the heir would receive an income tax-free death benefit along with the remaining balance of the IRA. It is truly a win-win strategy.
When You Need to Level the Legacies
Sometimes an estate is to be divided in a way that specific individuals are to receive certain assets, like an interest in a business. If the business comprises the bulk of the estate, that would leave less for other heirs. If all of the heirs are to be treated equally, life insurance can be used to equalize the legacy. For example, a rancher in Colorado died and left his ranch and another small business to his wife. There are also six surviving children – a son who runs the ranch, a daughter who runs the business and four other children who are not active in either the ranch of the business.
If the ranch and business were to be divided equally, the non-active for children would have control over enterprises in which they have no role. The widow used revenue from the businesses to purchased life insurance to guarantee an inheritance for the four children, while leaving the ranch and business to the children who are actually running them. While it may not be quite as simple as that – there are other estate planning considerations to ensure equal treatment – life insurance is the key to ensuring all of the heirs participate in the legacy.
Although life insurance does get more expensive for retirees, the problems it can solve can be far more costly to families where a sizable estate is involved. Even at older ages, it still provides significant leverage when it can solve problems or create larger legacies for cents on the dollar.