Many of us likely are frustrated when our senior clients surrender existing life insurance contracts upon entering retirement. Often couples and partners tell us that in the event of one spouse’s death the surviving spouse can simply live off the couple’s remaining retirement portfolio.
Typically these clients do not anticipate significant expenses associated with a spouse’s passing. Clients who surrender their life insurance contracts, or allow them to lapse, do not appreciate the “survivor income gap.” Consider the following points primarily aimed at couples and partners who want to retire their life insurance when they retire from the work force.
Couples should first consider the potentially substantial costs of final expenses associated with the death of the first spouse. Add to these estate administration expenses, taxes, and funeral costs, and clients could end up with a serious strain on the surviving spouse’s retirement savings. Poor market returns and inflation might also contribute to a financial hit from which the surviving spouse’s retirement portfolio might never recover.
Couples need to reflect on what would happen if some of their income was either reduced or eliminated because one of them died. Pension or Social Security benefits attributed to the deceased spouse may be lost or substantially reduced.
The surviving spouse may also see expenses increase due to a change in his or her income tax filing status going from “married filing joint” to “single” and the loss of the personal income tax exemption attributed to the deceased spouse.
Usually couples underestimate an increase in the survivor’s living expenses due to the loss of human capital. New expenses may be incurred to replace the lost physical labor attributed to the deceased spouse. Expenses in this category include home maintenance chores, managing finances and home health care needs.
Enlisting a simple spread sheet (as illustrated) can help clients understand the impact of lost income and increased expenses upon the death of the first spouse.
Clients should understand that financial life events are unpredictable. Certain financial events leading up to the death of the first spouse may strain a once healthy retirement savings portfolio. Events such as a prolonged illness, negative impacts from a natural disaster or a loved one who suddenly needs financial support can all negatively impact a couple’s retirement portfolio. The life insurance death benefit can help to financially bolster a surviving spouse against all the emotional anxiety produced by the loss of one’s partner.
As is true with any estate planning, one must consider who or what should continue to own the life insurance contract and who or what should be the policy’s beneficiary.