Life insurance is something that is often times not kept during retirement years. With the opportunity to presumably self insure at that point, many people will drop their term or let it expire. While this is a strategy of many, it is not always the best one to pursue. You may assume you don’t need or want life insurance after retirement, but how do you truly know how you will feel when you reach that age.
We speak to clients everyday that are looking to qualify for coverage that are 60 years old and over. They consistently say that they wish they had bought when they were younger or planned for some coverage into retirement. With that being said, it is certainly very possible to still qualify for coverage and the premiums will be determined by health. Premiums have become more and more affordable due to life expectancy increasing.
The amount of coverage and reason for coverage may be totally different than when the client was 35. At 35, they might have had a primary focus of replacing income if a premature death occurred. At 65, income replacement might be less important and it might be about estate planning, mortgage protection, and final expenses. When you are looking at your financial plan it is important to consider changing items of importance in your life. It is always a good idea to look at your plan every year or two, to make sure nothing has changed. If something has changed it may be something to address, or it may simply be something to keep in mind going forward.
This is a popular way to use affordable life insurance. Mortgage protection is basically a policy that pays a death benefit that will be enough to pay off a person’s mortgage in the event of death. A term life policy will be taken out for the term of the mortgage. A level term or a decreasing term product can be used for this, although a level term is a much better value. Decreasing term has a decreasing benefit, and level term has a level benefit. Once the term product is selected for 10, 15, 20, or even 30 years, that rate is locked in. The great thing about term is that the beneficiary can use the proceeds however they want to. In other words, they can pay off the whole mortgage, continue to make payments, or do something completely separate.
Having a level term policy with the flexibility of the use of proceeds can be very beneficial. This is a single use of insurance that is only factoring in one debt of the consumer. Often times there are other debts that would be left to a beneficiary, college funding goals that might not be reached, lost income, etc that need to be considered. As a single use product, term life can certainly be a perfect fit.
Another type of term product that is being used on a regular basis for mortgage protection is return of premium term. This is a term program that is level for a period of time (the length of the mortgage) and then if the client is still alive at the end of the term they get a full refund of premiums paid. The downside to this product is that it is more expensive than a regular term, but guarantees the money back.
When talking to clients it is always important to assess what they need life insurance for. They will tell us they need life insurance for everything from income replacement, mortgage protection, burial expenses, to supplemental retirement income. It is important to assess to make sure that they meet their most important needs with the insurance they have. Ideally, we would like them to meet every need that they have, but sometimes this is not realistic. For example, they only have 100 dollars a month budgeted for life insurance and can only cover income replacement, mortgage protection, college education protection, and burial expenses. They don’t have enough money allocated at this point to do anything other than term life insurance and create supplemental retirement income. This is a great outcome though, as we were able to protect all of their main liabilities. The protection is the most important thing here. Term is a great option for a modest budget as it allows the most protection immediately for the smallest amount of money.
For a single client, they may feel they need life insurance for a totally different reason. For example, they are thinking more in terms of accumulating money and less about death benefit. They do believe one day they will want the death benefit when they have a family. For the client to buy a permanent life insurance policy (whole life, or universal life) at this point and overfund it, can be a great idea. They can grow the money within the policy tax deferred and access money along the way with no penalty and tax-free. It is an opportunity to create another pool of money that can be used for retirement, that has better tax treatment than a 401k.
A lot of our clients will by life insurance based upon a single need. For example, they might want it to serve as mortgage protection for their primary mortgage. We worked with a client the other day who had a mortgage for 275,000 and wanted to have that paid off so her family would have the house free and clear with no payment.
Other single needs that we see clients by life insurance for:
Income replacement- replacing all or part of their income for their family.
Final expenses- To cover all of the immediate needs of the burial.
College education- Insurance to pay for the childrens education
Mortgage protection- To pay off the existing mortgage (s) so the family is not buried in debt
Tax Favorable Accumulation- The use of the cash value for tax favorable accumulation
Business loan- When a client is applying for a business loan and the bank requires life insurance in the amount of the loan
Buy-Sell- Life insurance on partners in a business that will buy out a partner due to their untimely death
Key Man life insurance- Taking out a life insurance policy on a key person in the business to help replace the value of that person to the business.
There are other single needs that people will buy insurance for. We try to have our clients avoid focusing on a single need and look at their overall picture and needs. With that being said, life insurance is a very effective way to cover a single need and create leverage.