Is Your Retirement Plan on Track?

August 2, 2020 | Article

The Role of Life Insurance in Your Retirement Plan During Times of Uncertainty

There’s nothing like a global pandemic to force you to focus your attention on your preparedness for the future. The volatile market combined with job loss or interruption is making it necessary to reevaluate your retirement readiness.
✔ 401k
✔ IRA
✔ Savings
✔ Life Insurance

“Life insurance? What does life insurance have to do with retirement readiness?”

Most people don’t think of life insurance as a retirement tool, but it’s important to consider what will happen to your family’s retirement plan if you die prematurely. Can your spouse still retire without the benefits your income would have provided? Life insurance can replace the income you would have earned and the savings you would have contributed throughout the remainder of your working life.

If you are a business owner, life insurance can provide your partners funds they can use to pay your spouse for your share, which can free up your partners to keep operating. Alternatively, life insurance could provide your family with a lump sum that would give them time to sell the business and replace the income lost due to your death.

Questions? Ask A Trusted Advisor.

How to Use Life Insurance In Your Retirement Plan
Obviously, the first step in this plan is to purchase the life insurance. It’s hard to know what kind you need. It’s hard to know if you have enough. And it’s hard to know if you need any at all. Insurance companies have made it even harder by coming up with bewildering names: whole life, term life, universal life. Some life insurance policies have a cash value while others do not. Some invest that cash value in the stock market while others pay a fixed rate of interest. Some insurance policies combine all of these ideas.

A recent study by life insurance advocacy group LIMRA discovered that most Americans thought a 20-year $250,000 level term life policy for a healthy 30-year-old costs about $400 a year. In reality, annual premiums for such a policy typically run about $150. No wonder, as LIMRA noted, that 83% of consumers forego buying life insurance. I see this misperception all the time.

One tip to save money on life insurance is to purchase it before your next half-birthday. Premiums are lower if you purchase your life insurance before you are within six months of your next birthday (your rate will be lower if you are 29 and five months old vs 29 and seven months old).

How much life insurance do I need? Use our life insurance calculator to find out.

In addition, some people are paying for insurance that is not right for them.1 This is why it’s important for you to sit down annually with an insurance professional to review how your policy works and how it will help you to protect your family. It is imperative that you make sure the policy is owned by the right person or entity. It is also vital to review a cash value policy periodically to ensure it will provide the benefits you need.

Benefits of a Life Insurance Policy Review

  • Policies that are older may not have enough cash value to keep the policy in force until an assumed age of death. This can be a shocking discovery if you are decades into a policy and you find out that the policy might terminate. You might discover that you must increase your premiums substantially to retain the policy.
  • Policies that are not owned by the appropriate person or entity can cost your family money. If the policy is within your estate, it may be subject to estate tax depending on your net worth. If the policy has an inappropriate owner and beneficiary, it may be subject to income tax.
  • Policies may have beneficiaries that are no longer alive or part of the family. Imagine how your current spouse would react if your life insurance went to an ex-spouse! Wills do not govern the beneficiary of a policy.
  • You may discover that your policy has a loan against it. This can happen when you borrowed the funds for some other purpose. It can also occur if you have not made enough premium payments to keep the policy in force. A loan that is not set up properly has the potential to implode a policy, and can create an income tax event for you.
  • You may currently be paying for too much coverage. All policies sold since Jan. 1, 2008, utilize the new 2001 CSO Mortality Tables, which reflect longer life expectancies and have allowed insurance companies to reduce their cost of insurance charges
  • New products may provide lifetime guaranteed coverage, which would protect you from outliving your coverage, no matter how long you live. Some older product designs were created to mature before age 100, which could potentially lead to unwanted tax liabilities at a vulnerable age, or even no coverage at all.
  • Underwriting innovations or your health status may have improved, which can reduce the cost of alternative coverage.
  • New features and riders may offer important new benefits. This can include return of premium or guaranteed death benefit protection, as well as the ability to access the death benefit for chronic illness or long-term care needs.

Life insurance is less expensive than you think. Click the button for an instant life quote.

Don’t forget long-term care insurance
Another piece that you may not realize belongs in your retirement plan is long-term care insurance. According to Morningstar, only 11% of adults 65 and older had long-term care insurance, while 52% of people turning age 65 will need long-term care services in their lifetime.

Regardless of the setting (your own home, a nursing home, or an assisted living facility), long-term care can be quite expensive. In 2019, the median annual cost for an assisted living facility was $48,612 while the average cost for a private room in a nursing home was $58,400. The median annual cost for a home health aide working 44 hours per week for 52 weeks per year was $52,624.

Recovery at a nursing home followed by a hospital stay is usually covered by health insurance and Medicare, but daily living assistance due to age or health often falls to an individual to pay on their own. Long-term care insurance can help keep your savings account intact and lessen the burden on family members and caregivers. While premiums for long-term care policies are traditionally somewhat expensive, purchasers can choose from different coverage options, including inflation protection, longer elimination periods, and nonforfeiture options.

With rising costs of long-term care, we recommend that everyone make a plan for how they will fund their care.

At Eide Bailly, we review policies for our clients to help prevent these and other issues from ruining your plan. This is a complimentary service, and well worth the time. We have found a wide variety of issues with policies that we’ve reviewed, and we understand their impacts.

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Financial Advisor offers Investment Advisory Services through Eide Bailly Advisors LLC, a Registered Investment Advisor. Securities offered through United Planners Financial Services, Member of FINRA and SIPC. Eide Bailly Financial Services, LLC is the holding company for Eide Bailly Advisors, LLC. Eide Bailly Financial Services and its subsidiaries are not affiliated with United Planners. 
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