A generation ago, clients had no residual value from their retirement plans. Life insurance was needed to provide a financial legacy. Today, the largest asset in many people’s estates is the value of their retirement savings.
That’s greater, in most cases than the value of their home. Is there a need for life insurance?
Today, people live longer. Is the value of life insurance still there? Many sell the house in which they raised their family and downsize, or move to an assisted living facility. Most don’t have any federal estate tax liability (at least under current law). The state estate taxes, if any, are at rates lower than capital gains. So, who needs life insurance?
Protection: Just starting out
Certainly, life insurance on my life is needed to replace my income, provided there is someone left who relied on that income for their financial support. I should have life insurance to cover my debts.
Life insurance death benefits can also help pay the expenses to educate my children/grandchildren. Not only is the death benefit worth having, but the cash value operates like a 529 savings plan (or Roth account): Contributed after-tax dollars accumulate tax-deferred and are distributed tax free. But cash value life insurance policies have fewer restrictions than 529 plans.
Once I accumulate funds (qualified and non-qualified), my need for life insurance lessens. However, consider re-thinking the use of life insurance and the selection of who should be insured. Which will occur first; your retirement or your parents’ (or grandparents’) death?
Yes, it’s a morbid conversation, but look at the internal rate of return (IRR) on premiums to death benefit. What return are you getting on your current retirement savings?
Make sure to adjust for income taxes during retirement for the non-qualified investments and after retirement for the qualified investments. I can reasonably guaranty that your parent/grandparent may not have died before your retirement, but will certainly die during your retirement. So, don’t stop funding retirement. Just take a piece of that budget and look at buying life insurance on people older than you.
At the death of the first spouse, life insurance death benefit can be used to replace income for a surviving spouse. This allows the couple to spend more.