Should retirees keep their life insurance?
By Robert Powell
BOSTON (MarketWatch) -- To keep or not to keep? That is the question many retirees face. Should they keep
their life insurance policy or not? Unfortunately, experts say there are no easy answers.
"I'm afraid that the only meaningful answer is: 'It depends,'" says John Olsen, co-author of "The Annuity
Advisor" and principal of Olsen Financial Group in Kirkwood, Mo. "Retirees are individuals, having
individual situations and goals. Some retirees need life insurance. Others won't need any life insurance.
And some may not need the life insurance they already own."
So what's a retiree to do? Step 1, says Edward Graves, a professor at The American College in Bryn Mawr,
Pa. and editor of "McGill's Life Insurance," is to revisit goals and objectives. Then retirees must put
finger to calculator.
How much do those goals cost? And is there enough money, including life insurance policies, to pay for
those goals? Is there too much money? Or is there just enough? The answers to those questions will dictate
what a retiree might do with a life insurance policy. "Many people don't realize that in many cases there
are still ongoing wants and needs," says Graves.
Those who don't have the time (you're retired so you must have the time) nor energy (then again, it's
pretty mind-numbing work) to do things by the book, might consider these rules of thumb, courtesy of Olsen,
Graves and Stephan Leimberg, co-author of "Tools & Techniques of Life Insurance Planning" You may need life
insurance if:
- You have a mortgage or large debt to pay off. Many retirees have purchased larger homes or second
homes late in life and still have mortgages on those properties. In other cases, they may have an open
home-equity line of credit with a large balance. In those cases, the death benefit could be used to pay
of such debt.
- You have survivors -- a spouse, children, grandchildren -- or children or grandchildren with special
needs. In some cases, a spouse who has a traditional pension plan might opt (with permission from the spouse)
to take a single life expectancy pension and then purchase or maintain a life insurance policy. Doing so
increases the monthly income from the pension. But it also means the pension stops when that spouse with
the pension plan dies. If done right, however, the death benefit should help the surviving spouse who
didn't have the pension maintain their lifestyle. Unfortunately, this strategy isn't right for everyone.
"It makes sense about half the time," says Olsen. And everyone who considers this strategy should crunch
the numbers. "It should be based on an informed analysis not an off-the-wall guess," says Graves. Things
to consider as part of the analysis include both spouse's life expectancy as well as payout rates. In
other cases, experts say a retiree who has a survivor with special needs should likewise consider keeping
their life insurance in force. Usually, experts say it's an either-or case with children with special
needs. Care is either state-funded or privately funded.
- You will face a significant state or federal death tax when you die or your surviving spouse dies.
In many cases, the beneficiaries of a large enough estate might need to liquidate in full or in part IRAs
or sell homes or liquidate other holdings to pay for what some call death taxes. In cases where there
might be estate taxes due, life insurance can be used to pay the bill. Often, couples will purchase or
maintain a second-to-die life insurance policy to pay the bill.
- You'd like to leave a legacy to your favorite charity. The strategies and tactics used can differ,
but the intent is the same. Naming a charity as the beneficiary of a life insurance policy is one great
way to transfer assets to organizations that could use the money. In some cases, a retiree who has a
large enough estate might consider either naming the charity as the owner and beneficiary of the policy
(assuming one lives more than three years after the transfer) to remove the asset from the taxable estate.
In other cases, Olsen says retirees might consider naming the charity as the beneficiary of an IRA and
leaving their traditional survivors as the beneficiaries of the life insurance policy. This tactic creates
a bit of a tax arbitrage. There's no income tax due on the death benefit if the traditional heirs are the
beneficiaries of the life insurance policy, but there would be income tax due on distributions from an
IRA if they remained beneficiaries.
- You anticipate needing a home health aide, an assisted-living facility or a nursing home and you
don't have the funds to pay for such care. Graves says retirees who anticipate such costs might consider
using the cash value in their life insurance policies to pay the bills.
- You want to help a business partner buy a retiree out. In those cases, the retiree should make sure
the business partner owns the life insurance policy.
If none of those things apply, if retirees have more money than they need, they could cut back on their
coverage, says Graves. They could reduce the death benefit to the amount they need. Or, if they don't
need life insurance at all, they could take the cash value in the policy or explore what's called a
life settlement.
Taking a life settlement involves plenty of risk, say the experts. But for those with a legitimate need
and for those who work with a reputable company, a life settlement can be a better option than taking the
cash value. With a life settlement, a private company buys a person's life insurance contract for less
than the death benefit but more than the cash value. The company becomes the beneficiary of the policy
and receives the death benefit when the original person insured dies.
Source: Bloomberg