Understanding Life Insurance in Retirement
Life insurance remains a vital consideration even after retirement. Despite rising sales since the COVID-19 pandemic, only about half of American adults have life insurance, and many of those who do may still lack sufficient coverage. Chuck Czajka, CEO of Macro Money Concepts, suggests that retirees often underutilize life insurance as a tool for both retirement and legacy planning.
Types of Life Insurance
Life insurance broadly falls into two categories: term policies and permanent life insurance. Term policies have a set expiration date and become significantly more expensive upon renewal. Permanent life insurance, however, remains in effect as long as premiums are paid and often comes with level premiums.
Permanent life insurance policies can also build cash value over time, which can be withdrawn or borrowed against. The cash value earns interest based on the policy type. For instance, whole life insurance grows at a fixed rate, while indexed universal life insurance earns returns based on market indices like the S&P 500.
Tax Benefits and Investment Considerations
One of the advantages of life insurance is its tax treatment. Gains on the cash value are tax-deferred, and loans taken against the policy are not subject to income tax, although they can reduce the death benefit. However, fees associated with some life insurance products, particularly variable and indexed universal life policies, can be high, sometimes reaching up to 3% annually.
Combining Life Insurance with Long-Term Care
Some life insurance policies allow you to use part or all of the death benefit for long-term care expenses. This feature provides flexibility, as beneficiaries receive either the long-term care benefits or the death benefit.
Life Insurance in Retirement Planning
Using life insurance can help retirees manage their savings more effectively. By covering final expenses or leaving an inheritance through a life insurance policy, retirees can feel more comfortable spending their other savings. Additionally, life insurance payouts are generally income and capital gains tax-free for beneficiaries, making them an efficient way to transfer wealth.
Considerations When Purchasing Life Insurance
When buying life insurance, it’s essential to compare quotes from multiple insurers and check their financial ratings to ensure they can fulfill their obligations. Medical underwriting is typically required, although some policies don’t require this, they are usually more expensive and offer limited benefits.
The Role of Insurance Agents
Many insurance agents work on commission, which can create conflicts of interest. Working with a fiduciary insurance representative can help ensure that recommendations are in your best interest.
In conclusion, life insurance can be a valuable component of a comprehensive retirement plan, offering benefits beyond just a death benefit. By understanding the different types of policies available and their potential uses, retirees can make more informed decisions about their financial security and legacy.
