Did you take out life insurance years ago to protect your loved ones? Just over half of adult Americans have a life insurance policy, and more are interested in purchasing one. However, needs can change later in life when children are older, and a retirement nest egg seems large enough to absorb financial shocks. Those who are approaching and retiring may see fewer reasons for their life insurance policy than when they first bought it, and may view the premiums they pay as a burden.
But for many, maintaining a life insurance policy or purchasing certain types in retirement has potential benefits in terms of taxes, estate planning, and long-term care. Here are a few ways to use a life insurance policy that you may not be familiar with.
The tax benefits of a life insurance policy are potentially even more valuable now that the “Stretch IRA” no longer exists. In 2019, the SECURE (Setting Every Community Up for Retirement Enhancement) law removed the ability for most unmarried beneficiaries to extend RMD (minimum required distributions) during their lifetime. Now, most beneficiaries other than spouses must empty their tax-deferred retirement accounts within 10 years of the death of the original owner. Depending on the account amount and the tax situation of the beneficiary, this could mean an increase in the tax burden and a quicker end of the tax benefits of the inherited account.
In contrast, life insurance products paid to beneficiaries are generally tax-free. In fact, some people should consider using life insurance to help transfer their wealth to the next generation. Life insurance policies can provide additional opportunities for business owners, such as paying off business debt, financing business buyout agreements related to the business or someone’s estate. , or the funding of pension plans.
It is estimated that 70% of Americans aged 65 today will need long-term care at some point, and the costs can be huge: the median annual cost of an assisted-living facility is $ 51,600 and the cost median cost
the annual cost of a private room in a nursing home exceeds $ 105,850. Yet many Americans approaching and retiring do not have long-term care insurance. Many people who want to plan for long-term care costs may not want to invest in traditional long-term care insurance because premiums can go up dramatically and there is usually no benefit if the owner never needs it. long-term care.
As a result, traditional long term care insurance has become less popular over the past decade. Another option is to purchase a life insurance policy with long term care benefits. These contracts combine the advantages of long-term care insurance with those of permanent life insurance by purchasing an optional rider. They can still provide a death benefit if the owner dies without needing long term care. If the owner needs long-term care, a certain amount of money or time is allocated to cover the costs. If this amount is not used, some contracts may offer a “return of premium” guarantee on death or contract termination. If a remaining amount is transferred, beneficiaries can benefit from it tax-free, according to the policy.
Unlike traditional long-term care insurance, the premiums for this type of life insurance do not increase. However, some require lump sum payments upfront, which may make it difficult for some to purchase a policy.
While your financial planning needs may change as you approach retirement, that doesn’t necessarily mean your life insurance policy is out of date. There are many potential benefits to life insurance beyond its traditional use to consider when creating a retirement or estate plan. A professional can help you understand how your particular policy works and whether any of these strategies might apply to your financial plan.