Ask the Advisor: December 2018

Ask the Advisor: December 2018

Is Life Insurance After Starting Social Security Worth the Money?

Q: Could you tell me the advantages and disadvantages of life insurance once we start Social Security?  Doesn’t Social Security pay widow’s benefits?  Do we really need life insurance if we have a (401)k and IRA savings?

A:  You are asking yourself the right questions. Many people buy life insurance to replace the income that would be lost when the policyholder dies and no longer is paid a salary.  Once you stop working, most of your income is likely to come from retirement savings, pensions, annuities, and Social Security, which pays survivors benefits, if you or a spouse dies.  There can be special needs, however, and for some retirees, life insurance may make sense.  Here are a few major considerations:

  • Do you have a mortgage?  A recent survey by national mortgage banker American Financing found that 44% of Americans between the ages of 60 and 70 have a mortgage when they retire.  Of that group, almost one-in-three expect to be paying on their mortgage for at least eight more years.  Life insurance can cover mortgage payments if you die, and a term life policy can be timed to end with debt payments.
  • Are you the parent or spouse of someone with special needs?  Permanent life insurance can make sure a child or spouse will have financial support when you are gone.
  • Have you calculated how much you might need?  How much income would be lost if you or your spouse were to pass away?  There’s a loss of retirement income, particularly when the higher benefit spouse dies.  The couple’s Social Security benefit is cut by one-third to one-half, and a couple’s private pension benefit (if any) is either cut in half, or disappears completely if you have not opted for a joint-and survivor annuity.  If you have a large estate, thriving business, valuable real estate and savings, would there be estate taxes to pay?  Some families choose to keep life insurance because the death benefits are tax free to heirs, and can give the surviving spouse a financial cushion.
  • What sort of income will your resources generate?  Will the income generated by your retirement savings be enough to cover the loss of income, expenses, and taxes if any, if you die?
  • Would the money spent on life insurance premiums be better invested in an annuity or other investment?  Some types of life insurance can be cost prohibitive.  Your best investment is to get unbiased advice from a fee-only certified financial professional who does not get a commission from selling life insurance policies, before dumping your life insurance, or taking out any new policies.

 

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