Life Insurance Key to Retirement Spending and Legacy Plan
Over the past several years, most of the clients that I have advised to purchase life insurance are retired and have no dependent need. The insurance has greatly helped their retirement spending and legacy plan. The only thing that would have been better is if they would have had the foresight to procure the permanent insurance at a younger age.
If you are retired or planning for it and have any desire to leave some or all of your life savings to your heirs, you should strongly consider owning permanent (not whole-life) life insurance. In my opinion, life insurance (death benefit) is the best asset to leave to your heirs. It’s proper function in retirement is as a WEALTH REPLACEMENT ASSET.
My experience is that retirees do everything they can to avoid spending the principal of their investment accounts. They do this because they either have a fear (rational or not) of outliving their money and/or they want to leave a portion of (or all of) their life savings to their heirs. Living off the portfolio returns rather than the creating a plan to enjoy the principal is a flawed strategy.
The flaw or shame of this strategy is that at some point later in life, you realize you are too darn old to spend the money you have in your nest egg. That’s money you saved, which you could have spent during your pre-retirement years and certainly during your more vibrant early years of retirement.
How owning permanent life insurance can help increase your retirement income
A real life example:
A 65 year old widow/mother of two has a $400,000 nest egg that she doesn’t want to spend because she would like her kids to inherit that money. Her kids would like to see mom spend and enjoy the money while she still can.
Take 2.6% or $10,500* per year from the nest egg and buy a $400,000 life insurance policy that will pay out to her kids when she dies. If the investment account were to earn 4% on average annually that would generate about (4% x $400,000) $16,000. She could put $10,500 into the wealth replacement asset/ life insurance and spend the extra income on herself. More importantly, she could start nibbling into principal because she doesn’t feel the need to save for her kids. If she wanted to guarantee a lifetime income stream, she could consider putting some or all of the money in for an immediate annuity.
How it works:
1. Kids inherit $400,000 income tax free – mom is guaranteed to accomplish her legacy goal.
2. Now mom can spend from the nest egg on whatever she wants with the peace of mind her kids will still get the money when she dies.
Of course, she can spend her nest egg, without ever procuring the life insurance, but she wouldn’t, because it would leave less for her kids.
The annuity strategy is ideal for people that want the guaranteed income stream they cannot outlive (like a pension). This is often a terrific strategy when you want to maximize retirement income as the lump sum of money you commit which is distributed back to you as income with interest over your lifetime. Once the distribution phase (your life or a fixed number of years) has ended, the contract ends and there is no money for your heirs.
Again, ideally this could work perfectly if you wanted to replace some or all of the assets you committed to the annuity with a life insurance policy that would pay out the same day (death) the annuity income ended.
The insurance policy ideally would include a long-term-care rider that would allow the widow to draw from the death benefit while she was alive to help pay should she need long-term care.
Life insurance is probably the most challenging tool in the planning tool box to understand and use prudently in one’s financial plan. This strategy works whether you have $400,000 or $4,000,000 saved for retirement.
*One last factor is your health. You have to qualify for the insurance and you will most likely never be healthier than you are today.