Purchasing Term Life Insurance to Retirement Age

Are you approaching retirement age and deciding whether or not to buy life insurance?

Many people debate whether or not to purchase life insurance when they reach retirement age. Luckily, affordable life insurance options are still available for most people who are aged 60 or older.

In this article we’ll help you determine whether or not you need life insurance and we’ll provide you with some tips to save money on life insurance.

Quick Article Guide:

1. Is Life Insurance Necessary for People Over 60?
2. When Do You No Longer Need Life Insurance?
3. How Long Should I Carry Life Insurance?
4. What Type of Permanent Coverage Should I Buy?
5. Can Life Insurance Be Used to Reduce Estate Taxes?
6. Do I Need to Create a Trust to Reduce Estate or Inheritance Taxes?
7. Can I Purchase a Policy to Leave an Inheritance for a Special Needs Child?
8. Can I Purchase a Policy to Leave Money to a Charity?
9. We’re Here to Help

Is Life Insurance Necessary for People Over 60?

Many people we speak with assume that life insurance is unavailable or unaffordable after the age of 60. The good news is that if you’re in fair or better health, qualifying for affordable life insurance is easier than you might think.

Is life insurance necessary for someone who is 60 or older, though? Most people think that the answer to this would question be an obvious, “No.” However, people are continuing to live longer and longer and the cost of living has dramatically increased over the last few decades. In addition, the cost of final expenses has also increased and as a result, life insurance for retirees is becoming much more common.

Some of the more common reasons that retirees decide to purchase a life insurance policy include providing income replacement for their spouse, leaving an inheritance behind, preserving their assets from estate taxes, or providing cash to pay off any outstanding debts or medical bills they may leave behind. In addition, many retirees also purchase life insurance to get the most from their pension. This is also known as pension maximization.

When Do You No Longer Need Life Insurance?

In general, as we get older, our need for life insurance tends to decrease. Over time, our mortgage gets paid down and hopefully the balance in our savings account increases. We also tend to have fewer expenses once our children become self-sufficient and move out. In addition, we generally become more responsible with money.

However, in 2007, the financial markets crashed. Many people experienced a severe financial downturn due to poorly performing investments or even a loss of employment. Some of the clients we work with were forced to pull equity out of their homes or rely on credit cards to pay the bills and make ends meet.

Due to these high-stress economic times, we have seen a rising trend of more people continuing to make payments on their mortgages during their “retirement years.” Many people also retired with less money set aside than they had originally intended or with substantial credit card debt. As a result, life insurance for retirees is becoming more common.

How Long Should I Carry Life Insurance?

In most cases, a life insurance policy is purchased to provide financial protection to your family until your mortgage and debts are paid off and your children have moved out. Term life insurance is very popular because these policies offer affordable coverage for a set duration of time, usually 10, 15, 20, 25, or 30 years. During the “term” of your policy, your rates are guaranteed not to increase and your coverage cannot decrease even if your health declines.

Term life insurance is usually available up to the age of 80, but it does not build cash value, which is why it is so affordable. Purchasing term insurance can help you get the most out of your pension plan, also known as pension maximization. In addition, term insurance is often beneficial for those who are working into their retirement (even if it’s only part-time), because you can purchase an affordable policy to bridge the gap to your planned retirement age or later.

If your spouse is financially dependent on your income, a term policy can provide your spouse with a financial cushion if you were to pass away before reaching retirement or paying off the majority of your debt. If you feel like your need for coverage will end before you’re 85, select a term that will protect your income or financial goals until this planned life event(s). Most life insurance companies stop offering a 20-year term after the age of 65 and 10-year term after the age of 75.

In some situations, our clients need to carry a large life insurance policy for the rest of their life. In this scenario, buying a term policy is not the best option. Instead, we recommend buying a GUL policy with guaranteed rates and coverage until age 90, 95, 100, 105, 110, or later. These policies are affordable because they work just like term life insurance and they do not require an investment value. A life insurance policy only pays a death benefit if you die before your term expires and most term life insurance policies end before the age of 85. People are living longer and longer, and many Americans are now living past the age of 85.

If you are purchasing life insurance to leave an inheritance, protect a child with special needs, or pay off final expenses, avoid a traditional 10, 20, or 30-year term that you’ll likely outlive. Instead, consider a “permanent” non-cash accumulating policy. These policies are also ideal for estate planning because they can be setup to reduce or avoid estate taxes. To learn more about using life insurance to reduce or avoid estate taxes, please see our article, “Estate Planning with Life Insurance – Insider’s Tips and Advice.”

What Type of Permanent Coverage Should I Buy?

There are many types of permanent or whole life insurance, but some policies are much better than others. Whole life insurance and universal life insurance policies are the most popular form of life insurance even though they’re more expensive than other types of coverage. Celebrity endorsers on TV commonly market whole life insurance, but these policies will accept almost anyone – making them very expensive for a small amount of coverage. Universal life insurance policies are extremely expensive and they require risky investing that is not guaranteed.

The best policy to buy is a guaranteed universal life insurance policy. These policies are like a whole life policy because you can guarantee your rates and coverage until the age of 90, 95, 100, 110, or even 120. They are also affordable because they do not require an investment value to build cash value; they work just like a term policy. For this reason, guaranteed universal life policies are also commonly referred to as term-to-90, term-to-95, term-to-100, etc., depending on the age you decide to guarantee your rates and coverage until.

Based on your lifetime expectancy, or the longevity in your family, you can choose the length of the policy that best suits your needs. If you’re unsure of how long to guarantee your coverage and rates until, you may want to use the Social Security life expectancy calculator. We always recommend extending your coverage to at least 5 years past the age provided. Permanent life insurance should only be purchased to leave an inheritance, reduce estate taxes, maximize your pension, or to pay for burial costs and final expenses. Purchasing term life insurance is more ideal if you want to replace lost income or secure debt for a set number of years. When purchasing any form of life insurance, the most important issue to consider is the affordability of the policy. Make sure your policy is affordable, especially if you are on a fixed income. If you are unable to make the payments on your policy each month, your coverage will lapse.

Can Life Insurance Be Used to Reduce Estate Taxes?

Life insurance can be extremely beneficial for retirees that own businesses or have estates and assets valued at five million dollars or more. Each year the IRS announces the estate tax exemption for the following year. If the value of your estate and your assets exceed the estate tax exemption, any assets you own that exceed this value are subject to an estate tax when you pass away.

In December 2016, the IRS announced the federal estate tax exemptions and rates for the upcoming year, 2017. As of 2017, the estate tax exemption is set at $5.49 million and the estate tax rate is set at 40%. In other words, the value of your estate that exceeds the current estate tax exemption of $5.49 million is subject to a 40% estate tax from the IRS. For married couples with combined estates, the exemption amount is doubled to $10.98 million, with the same estate tax rate of 40%.

These federal estate taxes are levied against your estate by the IRS and are charged in addition to any inheritance taxes that your state may also collect from your heirs.

As an example, if you are married and the total value of your estate and assets is worth $15 million, your heirs will owe estate taxes on $4.02 million dollars: $15m – $10.98m = $4.02m

To calculate the estate taxes due, multiply the value of your estate that exceeds the estate tax exemption by 40%: $4.02m x 40% = $1.608m

This creates a total in estate tax liability of $1.608m and the recipients of your estate must pay this amount to the IRS within 9 months of your passing. Many families are forced to have estate sales or liquidate the assets that you intended to leave behind for them in order to settle this debt.

To offset this potential tax liability, our agents normally recommend purchasing a guaranteed universal life policy or a “term to age 90” or later. The death benefit from this life insurance policy can be used to pay the estate taxes your heirs would owe to the IRS when you pass away, allowing them to keep all of the assets you intended to leave behind for them. These policies are very affordable because they do not build cash value and the rates and coverage are guaranteed until the age you chose (90, 95, 100, 105, 110 or even 121), just like a term policy.

Do I Need to Create a Trust to Reduce Estate or Inheritance Taxes?

The death benefit from a life insurance policy is usually tax-free, unless the value of your estate exceeds the estate tax exemption. If your estate is worth more than the exemption, the death benefit from your life insurance policy will be considered part of your estate, and will be subject to estate taxes.

To avoid any unnecessary estate taxes on your life insurance, we advise our clients to set up an irrevocable life insurance trust, or “ILIT”. An irrevocable life insurance trust separates your life insurance policy from your estate so it is not subject to estate taxes. This provides the best solution for you to maintain some legal control over your life insurance policy while providing your heirs with liquid, untaxed cash to pay off any expenses that are incurred after your death. By having this cash available to pay off unexpected expenses, your heirs can avoid “fire sales” where they may be forced to sell off stocks, real estate, businesses, or jewelry at inopportune times.

Since an ILIT separates the death benefit of the policy from the total value of your estate, once it is set up, you no longer have the right to revoke the trust and you cannot be the trustee. This is because if you own your own policy, the IRS considers it to be a personal asset. If your assets exceed the federal tax exemption for the year, they’ll be taxed. The purpose of the ILIT is to protect the life insurance benefits from creditors and estate taxes. They can be set up easily with the help of an estate attorney or your bank and most of our clients appoint a close family member or an executive at their bank as the trustee of their life insurance trust.

Irrevocable life insurance trusts are a pretty complicated process, but they provide many benefits and they can save your family millions of dollars. Even though this sounds difficult, our agents have helped hundreds of people in this situation and we will help you through the process. Give us a call and we will be happy to help you with your estate planning needs.

Can I Purchase a Policy to Leave an Inheritance for a Special Needs Child?

Retirees that are parents of children with special needs may also want to consider purchasing permanent life insurance. If your child will need ongoing medical treatments or assisted living after you pass away, the death benefit from your life insurance policy can be used to provide an inheritance or fund a special needs trust. A special needs trust will separate your life insurance policy’s death benefit from your child’s personal assets, preserving their eligibility for government benefits like Medicaid and Social Security Income.

If you’re considering creating a special needs trust, you’ll want to purchase a permanent life insurance policy. The best policy for this scenario is a guaranteed universal life policy that does not accumulate a cash value. These policies provide guaranteed coverage with fixed rates until the age of 90 or later. Upon your passing, the death benefit from your life insurance policy will be paid as a tax-free lump sum directly to the trust you created for your child. The trust can then allocate money to your child in installments or as needed. When you create a trust, you’ll also need to appoint a trustee to oversee and manage the trust. This can be an attorney, a trusted relative, or an executive from your bank.

Another option for funding a special needs trust is a survivorship, or second-to-die life policy. These policies may be ideal in this situation because they can be less expensive than purchasing a guaranteed universal life insurance policy, and do not pay out until both parents pass away. Once you purchase the policy, you can set up a trust to ensure that the money is used appropriately after you are gone. If you’re unsure of which type of policy is best for your situation, feel free to give us a call and one of our experienced agents will be able to provide you with rates for both options.

Can I Purchase a Policy to Leave Money to a Charity?

If your spouse and children are already financially secure, some retirees will purchase a life insurance policy to leave a large donation to their favorite charity. The annual gift tax exclusion allows you to make an annual donation of up to $14,000 to your charity of choice. Rather than making the maximum annual donation of $14,000, you can put that money towards purchasing a permanent life insurance policy. Depending on your health and age, you can probably purchase at least $500,000 of permanent coverage for $14,000 per year. This money will then be left to the charity you name as the beneficiary of your policy. In the long run, your insurance policy will probably provide more of a benefit to your charity than making the maximum annual donations each year for the rest of your life.

Many charities actually recommend this strategy to their donors rather than making annual donations. If you have any questions about how these tax deductions work, we recommend speaking with your CPA.

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