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.

If the couple’s federal taxable estate is either currently at, or is projected to exceed, the existing federal estate tax exemption equivalent (currently at $2 million for 2008), consider third-party ownership. When considering death taxes, do not overlook the impact of state transfer taxes.

A living credit shelter trust set up for the benefit of a surviving spouse might be a good candidate for the ownership of the life insurance contract(s). Clients should consult with an attorney before assigning their life insurance contract(s) into such a trust so that they can be properly advised on any income, estate or gift taxes associated with the transfer. The beneficiary designation on the life insurance contract should then be updated to reflect the change of ownership.

Conversely, if the couple’s federal taxable estate is currently below and, is projected to stay below, the federal estate tax exemption equivalent, the client(s) should retain ownership of the contract(s).

Also, do not overlook the possibility of going back to a $1 million federal unified estate tax credit in 2011. Once again, check the beneficiary designation on the life insurance contract (including contingent beneficiary designations) to make sure it coordinates with the client’s desires.

Should the client still not see the continued need for life insurance into retirement after reviewing the “survivor gap,” have him or her consider using the life insurance contract to create a legacy. The client may be delighted to leave the life insurance death benefit as a legacy to children, charity or a favorite institution.

It is also essential that clients consider long term care insurance to protect their life insurance from the potential financial drain created by an extended health care need.

Helping clients think through the points above will help them to make an informed choice when it comes to keeping their life insurance contract(s) into retirement.

Many of us bought life insurance to meet our emotional needs and responsibility to financially protect our loved ones. These needs do not retire when we do.