Lifetime Need for Life Insurance
One of the primary purposes of life insurance is to replace lost income if one spouse predeceases the other. Many people reason that the need passes in retirement because income is no longer being realized, These people forget about Social Security benefits as well as unfavorable tax treatment if one spouse passes before the other.
Generally, when one spouse passes, the surviving spouse retains the higher of the two Social Security benefits, while the smaller benefit stops. If we look at a couple each with a Social Security benefit of $29,760 and IRA distributions of $46,000, losing one benefit would result in a 28% reduction in gross income. Taxes, however, will increase by 42%! How can this be? The survivor is now under the Single tax rules, rather than Married Filing Jointly. When all the calculations are completed, the surviving spouse would have 32% less in next after-tax cash flow.
Life Insurance Can Shelter Non-qualified Income
If income from non-qualified accounts, that isn’t needed for ordinary living expenses, is causing higher than necessary taxes, life insurance can be an effective sheltering technique. Many modern policies provide significant liquidity so if money is needed, it can be withdrawn. There are also hybrid plans than can provide long-term care benefits as well as life insurance if the long-term care benefits are not accessed.
Life Insurance Can be an Important Piece in the Retirement Income Puzzle
Don’t assume the need for life insurance disappears when you are no longer working. If you have an existing policy and would like to see how it – or a new policy – can benefit you in retirement, please reach out to a Tax Acuity Approved Advisor™ on our contact page.