Why Life Insurance Is Essential for Retirement
By Jeff R. Wilhelm, JD
Most people think of life insurance as being protection for a family in the event that the primary bread winner dies, leaving a spouse and children behind. This is indeed a very important reason for life insurance but it is just one of several good reasons. Even a retiree who has already saved for retirement and who no longer has children at home should strongly consider life insurance. There are at least three good reasons.
The most popular reason but ironically the least important of the three for having retiree life insurance is to pay for final expenses such as funeral home costs and burial expenses. Most people do not want to leave their spouse or adult children with $25,000 or so in final expenses when they die. However, by the time a person is age 65 or older, they should already have saved and set aside the money for that purpose. If not, they should consider the approach set forth in my companion article entitled “The Truth about Final Expense Insurance” for the best way to responsibly address this need.
A much more important reason, but often overlooked one, for having retiree life insurance is loss of income. The fact that you have retired does not mean that you no longer have income that is dependent upon you remaining alive. Social Security benefits are a prime example of “it ends when you end.”
Although Social Security benefits might not be big ($15,000 per year or so), they are big enough to warrant protection. Consider as an example a retired husband with a wife that live on a budget of $45,000 per year. The couple meet their budget with $15,000 from his Social Security, $12,000 from her Social Security and $18,000 from investment income. If one of the two spouses dies, the surviving spouse can keep the greater of just one of the two Social Security incomes ($15,000) and will lose the other ($12,000). That will leave the surviving spouse with a total annual income of $33,000 versus the $45,000 they were previously living on. Even though there is one less spouse, you can be fairly certain that the surviving spouse’s living expenses will not have been reduced by the 25% reduction in his/her income. The surviving spouse will still have expenses for a place to live, electricity, gas, food, medical, transportation etc. This is where life insurance comes in to fill the lost income need.
What amount of life insurance is necessary to replace, for example, the need for $10,000 per year in lost income for life? The answer is approximately $200,000 based on an interest rate assumption of 3% and a life expectancy of 30 years. Many people do not have $200,000 in permanent life insurance to meet this need.
The final reason for retiree life insurance is more in the nature of icing on the cake and can come with the benefit of killing two birds with one stone. This reason is based on meeting the cost of long term care expenses. You have heard it over and over again but if you are like most people, you have probably not really listened to the facts, including that you have as much as a 69% chance of needing long term care at some point after age 65. That is a 69% chance! If we were talking about rain, you would certainly cancel the family picnic. Further, the cost of long term care is growing every year with the average annual cost for various types of care at:
The average length of one or more of these annual costs is about three years. That puts the total cost to you of the risk of long term care at about $111,600, $213,525 and $259,200 respectively. Do you have that much money set aside that is not needed for investment return/retirement income?
There are two ways that retiree life insurance can help. First, the ultimate death of the spouse that first needs long term care will result in a death benefit that can help pay back the surviving spouse for the long term care expenses. Another way for retiree life insurance to help with long term care expenses is with a life insurance/long term care hybrid policy. A life insurance/long term care hybrid policy covers both long term care expenses up to the amount of the death benefit even thought the policy owner has not died. It also provides a death benefit like a regular life insurance policy. The hybrid plan, however, lowers the overall cost of the insurance because under a hybrid policy there is a sharing of the benefits between the two aspects of coverage. With a life insurance/long term care hybrid, the long term care risk, if it materializes, is paid for first out of the life insurance death benefit before the insured ever dies. In other words, a person with a hybrid policy who ends up having long term care claims can end up without life insurance once that life insurance benefit is exhausted by the long term care claims but they will have had their long term care expenses paid for. If they do not use the long term care benefit, they keep the life insurance benefit. Another reason why the hybrid costs less is that the life insurance death benefit that is used to cover long term care costs does not grow over time like the inflation protection rider that you can get with a traditional long term care insurance policy. In other words, you are getting less coverage as time goes by as the cost of care goes up but at least you have some very important coverage both in terms of long term care and life insurance. In essence, you have killed two birds with one stone.
Whether you have already retired or even if retirement is twenty years away, you should consider now the important role that life insurance plays in retirement. The sooner you act, the less expensive the life insurance will be and the more likely you will medically qualify to get it. It can never be too early but you can certainly be too late.
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