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The Life Insurance Retirees Don’t Need
When retired, cash flow matters. For many people life insurance premiums can be a large budget item, and over a 25-year retirement can be an enormous outlay. I work mainly for retirees and like to make sure these long-term trends are needed and working in their favor. Life insurance is definitely needed during many different points in life. Planning for the possibility of a bread-winner’s death, replacing income, paying off the mortgage, setting up children’s college funds, and providing liquidity to pay estate taxes, are all a host of excellent reasons to have life insurance. There are times when those needs come and go. The mortgage gets paid off. One spouse retires. Children are grown and educated. Or most recently, a need to reduce your life insurance coverage, because the likelihood of paying estate tax has been significantly reduced by the new tax package. Do you just cancel the life insurance when that happens? Not without careful consideration, but consideration there must be. Often people do keep coverage that is no longer insuring any risks or serving a clear purpose. The premiums get paid out of habit, momentum, or who knows why. Should you keep paying the premiums? Maybe not.
Many life insurance policies were purchased for paying an estate tax that are often no longer needed. I remember when I started as an advisor that the Federal estate tax exemption was $1,200,000 for a couple, and it is now above $22 million. Meaning you generally need to have an estate of more than $22 million to owe Federal estate tax, with some basic planning. While the estate tax exemption could be reduced in the future, as it has bounced around a bit over the last 25 years, it seems politically probable to not have the estate tax affect middle America, even upper-middle America. So, you may not need that insurance coverage any longer and may still be paying for it.
It could be worse than that. The policy may have been purchased with a projected interest rate that is triple or quadruple the interest rate actually earned and will likely implode in the future — end up canceled before you die. After paying all those premiums?! Yes, it could run out of cash value and be cancelled. We are still in what has been at least a decade-long period of extreme low interest rates, and the cash values required to be in your policy to pay or subsidize your future premiums may not be quite the cash value the original agent was hoping. Meaning, you better be paying attention to your cash value life insurance policies if you want them to continue. Internal annual insurance costs go up exponentially in your sixties and seventies.
What should I do? Canceling a poorly performing (declining value/imploding policy) or no longer needed life insurance policy can have a significant tax cost. There are options on handling the cash value without taxation, or it may be best just to take the cash value. Evaluate your policies and ask someone who is not selling you anything. An insurance agent can make a substantial sale replacing your imploding policy with a new one, and admittedly that may be the right move. But first, you might talk directly to your insurance company and ask them if your policy might likely continue at current interest rates? Ask them how your policy is faring, “Is the policy going to give the results I want with reasonable assumptions?”
Consider, “Do you just want to keep the policy, so your family receives the extra dollars at your death?” Are the premiums affecting your lifestyle? Most importantly, do you really have a need for the insurance? Be sure to consider all options and obtain all relevant information before taking any potential actions that could affect your retirement.
These are the opinions of Eric W. Johnston, CFP, AIF, President/Financial Advisor at InFocus Financial Advisors, Inc. Securities offered through Cetera Advisors LLC, Member FINRA/SIPC. Cetera is under separate ownership of any other named entity.