Notice I said “asset,” not “investment.” At death, don’t investments morph into just another asset? I think so and I try to convey this to my clients. Life insurance is not an investment, nor should it be compared to an investment.
However, if structured to be in force at death, then it is an asset. Unlike other forms of insurance, we are guaranteed to have a claim and we know how much it is worth (death benefit), we just don’t know when this asset will be “realized” (at death).
What makes life insurance (the asset) a potentially great vehicle for retirees?
- The leverage: the total payments/premiums made are usually a fraction of the death benefit paid.
- While the net return (death benefit minus total premiums) is reduced over time as the insured contributes more premium, the overall return is usually a good value.
- The entire death benefit is received income tax-free and payable in full no matter when the insured dies with the policy in-force.
Have you ever thought about leaving money at death to your spouse or children?
Most retirees I come across do not own a substantial amount of life insurance, but they do want to pass a portion of their life savings to their spouse and/or children.
Their default option is to not spend their retirement savings because if they spend their principal, there will be that much less for their survivors. What if they owned life insurance in the amount they wanted to pass on?
For example, if a retired single woman had $500,000 in assets and $500,000 in life insurance with a desire to pass her retirement nest egg on to her children:
Instead of living off the interest from the $500,000, she could draw down the principal over her lifetime (an annuity stream of payments could guarantee the stream for her lifetime) and she could leave her heirs the tax-free death benefit from the insurance.
She would have much more money to live on and her children would inherit her entire nest egg.
My mother is in this boat. Generously, she does not want to not spend the principal that she and my father built together so it can be passed to my sister and me. However, we want her to have more spending money today and for the rest of her life. As her advisor, my recommendation was for her to buy a life insurance contract in the same amount as her IRA balance. That way she could spend the IRA balance and still leave the life insurance as a tax-free asset for her kids. After this was in place, she started drawing down the IRA balance to help her lifestyle. Now, rather than passing her kids/us the taxable IRA, she will pass the life insurance asset tax-free.
It’s a win/win strategy.
Life insurance is a terrific tool for retirees to use as an asset transfer vehicle for retirees.