Life Insurance in Retirement
Life insurance is a complex subject. There are people that will tell you that you need life insurance, and there are others who would rather focus on their retirement planning. And there’s really no wrong or right answer here.
Some people want to leave money to loved ones or spouses, and their way of doing this is through life insurance.
Today, we’re going to discuss life insurance in terms of retirement planning with an objective view. Not every client that we work with will benefit from life insurance, but there are times when life insurance may align with your overall goals.
But before you can really decide on getting life insurance, it’s important to know what types of insurance are available:
- Term insurance
- Whole life
- Universal life
- Variable universal life
- Indexed universal life
All of these types of life insurance are important to know about because they have their advantages and disadvantages. If you don’t know these key points, how can you determine if a certain type of life insurance is right for you?
Understanding Term Life Insurance
Term policies are a type of life insurance that is the easiest to obtain. You take out term life insurance for a period of time. Let’s say that you pay into the policy for 10 to 20 years. If you die during this period, the insurance will pay out a death benefit.
With every type of life insurance, death benefits are tax free.
If a beneficiary receives a $1 million payout from your insurance, they don’t have to pay a single penny in taxes, which is very beneficial.
Why Term Life Insurance Makes Sense
Term life policies are cheaper and easy to get started with. A lot of people take out a term policy when they’re younger so that the person’s family can pay their bills or even pay off the house if you die.
You may even receive this type of insurance for free from your employer.
Sometimes, the policy can be expanded when it’s from your employer, which allows you to pay lower rates for even higher levels of insurance.
Underwriting is common, so you will have to take a physical exam to satisfy the insurer. We’re also seeing a lot of insurers online offering term life policies with no underwriting. While no underwriting is beneficial and easy to get started with, the insurer takes on more risk, meaning your premiums will be higher.
Understanding Whole Life Insurance
Whole life is an insurance that is offered until the end of your life. Your policy will pay out a death benefit, and it can also accumulate a cash value. The policyholder can access the cash value of their policy during their lifetime to:
- Invest the money
- Borrow against it
- Withdraw it
When legacy planning, let’s say that you want to leave your two children $500,000 each. You can use your IRA to pay for your whole life policy and leave the money to your children tax free.
The cash value of the whole life policy is very beneficial because you’re able to use the cash value you build.
Understanding Variable Universal Life Insurance
A variable universal life (VUL) policy is similar to a whole life in that it is for the entirety of your life and has a built-in savings component. The main difference is that this savings component has an investment subaccount that is similar to a mutual fund and is invested on your behalf.
You can lose cash value when investing in a VUL.
Understanding Indexed Universal Life Insurance
An indexed policy is the same as a VUL, but the key difference is that instead of a mutual fund being used to invest your cash value, the investment is put into an index. This is very similar to an index annuity.
The cash value can be linked to one or multiple indexes, such as the S&P 500 or NASDAQ.
Investing in an entire index allows investors to automatically diversify their portfolios. You also can’t lose your cash value in an indexed policy. You’ll be able to rely on a nice rate of return with an indexed universal life plan.
Let’s imagine, for a minute, that you have cash that is stashed away in a CD or a savings account. You could, instead, put this money into an indexed policy that earns a 2% to 5% return (it can also be much higher).
And you have access to 100% of this money at any time that you need it.
If you die, all of this money and the death benefit will go to your beneficiaries.
When talking about retirement planning, life insurance is a small piece of the plan. You can leverage the right type of account for its tax advantages and even grow your money while still having access to it.
The added perk is that the death benefit is dispersed to your beneficiaries.
Life insurance is fully underwritten, meaning that the insurer will want to look at your medical history. If you have some medical issues but they’re under control, you might still pass-through underwriting.
For example, let’s say that you have high blood pressure. You might assume that you won’t be able to pass through the underwriting. Medications can help get your blood pressure under control, and if it’s under control, you have a good chance of getting approved.
We believe everyone should consider life insurance, but for some people, this type of insurance won’t make sense. The best thing that you can do is educate yourself on the benefits of life insurance and determine if it’s the right choice for you.
We can also discuss your options and help you determine if life insurance is the right choice for you.
For some people, it may not be part of their retirement plan. But for other clients, life insurance can provide you with peace of mind that you’re leaving your family with financial security when you’re gone.
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