The Best Way to Buy, Sell or Replace Your Life Insurance Policy

The Best Way to Buy, Sell, or Replace your Life Insurance Policy 

Written by Financial Educators

Presented by Quantum Capital Investments

Why Would a Retiree Own Life Insurance?

Traditionally, life insurance is purchased during your working years to replace your income for your family in case you died. But if you are retired, do you still need life insurance? There may be three reasons to own a policy:

1. Because many couples are dependent upon two social security checks or two pension checks, when one spouse passes away, the other spouse finds that their income falls, but many of the expenses and lifestyle requirements remain. The inexpensive way to protect against this is to own term life insurance.

Recently, I obtained a $200,000 policy for a 70-year-old male for a premium of $200 monthly.[1] If he predeceases his wife (women statistically outlive men by four plus years)[2], his wife will receive this $200,000. Invested for income at 6% (a hypothetical rate), this would produce $12,000 annually of income to offset the loss of his social security check. If used up over her lifetime, (assumed to be another 4.5 years), the principal plus interest would generate over $52,000 annually for the wife.

2. For estate planning reasons: Let’s say you have developed your net worth by owning real property. One son takes an active interest and manages most of your property. The other son lives 2,000 miles away, travels around the globe as an archeologist, and has no interest in the properties. Maybe you want to leave the properties to the son who cares for them, but are concerned about what to leave the other son. Easy answer, buy life insurance and name the archeologist as the beneficiary.

Or … if your estate is over $1 million, the excess is subject to estate taxes at hefty rates (up to 55%% starting in 2011). A simple, often inexpensive, way to pay the tax without taking money from the beneficiaries is to have a life insurance policy to pay the tax.

3. To make the most of your IRA or retirement plan: Say you are age 70 and it’s time to start taking mandatory distributions from your IRA. Let’s assume that the distributions are a hypothetical $15,000 annually. If you invested that at a hypothetical 6% (3.9% net after combined taxes of 35%), you would accumulate $442,000 over 20 years. Of course, that amount is taxable when withdrawn. Take that same $15,000 annually and buy life insurance, and upon death your heirs will receive $600,000[3], tax free.. You can do the same if you have a qualified retirement plan, but the numbers are even better as you can purchase the policy inside the plan with pre-tax dollars.

As you see, there are powerful ways to use life insurance for retirement and estate planning purposes.

[1] Prudential 10 year level term 1/3/10, Male, age 70, Florida resident rated preferred plus. The purchase of life insurance involves costs, fees, expenses and potential surrender charges and depends on the health of the applicant. Not all applicants are insurable. If a policy is structured as a modified endowment contract, withdrawals will be subject to tax as ordinary income and withdrawals prior to age 59 ½ are subject to a 10% penalty.

[1] Social Security Administraton Life Expectancy Tables http://www.socialsecurity.gov/OACT/TR/2009/lr5a3.html 2009