Advisors and agents who single-mindedly encourage clients to buy term life insurance just to get them through their working years are overlooking some pretty significant risks that still exist well into our golden years.
I agree with the notion that several risks driving the need for life insurance during our working years tend to decrease over the time leading to retirement. Mortgages get paid down. Income replacement in the event of premature death becomes less of an issue. College debt hopefully is taken care of, although I’m not so sure about that one. The numbers on college debt in this country are staggering, but that’s a discussion for another day.
Yes, those risks are typically lower as we approach retirement. However, that is not always the case, and a whole new set of risks come into the picture — risks that actually increase the further you go into retirement.
Social Security/pension income replacement
It’s generally true that when one spouse passes away, there is a somewhat proportionate reduction in the living expenses of the surviving spouse. However, it’s not always perfectly proportionate to any resulting reduction in income. In many cases, that drop is significant and noticeable. A properly funded permanent life policy can help fill that gap with accessible cash value.
Of course retirees have access to Medicare and Medicare Supplement insurance, but that doesn’t mean they have all bases covered. A recent Fidelity study found that the average couple retiring at 65 can expect to pay $220,000 in out-of-pocket medical expenses. That’s a lot of green! More and more of today’s modern life policies include provisions to help cover the costs of care for critical illness, chronic illness and cognitive impairment. If you’re like me, you’re having these discussions with clients every week. It’s a big issue, and it’s on everyone’s mind. Clients want to protect their assets, and they don’t want to become a financial burden on their children if they require a higher level of care.
Imagine you’ve acquired a nice little nest egg over the course of your working life. In fact, you’ve accumulated more than enough to support your retirement lifestyle, and you’re sufficiently covered for any potential need for long-term care. By nature of its very design, life insurance is an incredibly efficient tool for transferring that acquired wealth to those people and causes you care most about. This is just good strategy, but you have to be smart enough to pull the trigger while you’re still healthy enough to qualify.
Required minimum distributions (RMDs)
Similarly, if you have money in qualified accounts you really don’t need, then you are required to take those distributions starting at age 70½, whether you like it or not. As we both know, there’s a reason for that. The U.S. government is patient, but not that patient. Uncle Sam wants his cut. The impact of taxes on those distributions can make it extremely difficult for someone to pass the full value of their wealth to their heirs. A permanent life policy with guaranteed premiums and guaranteed death benefits for life can help overcome the destructive impact of RMDs. The key is to buy while insurable, so it’s best not to wait until retirement to think about this. The sooner, the better.