Peter Boys, Boys Financial Services

Making the most of Life Insurance for Retirement

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Declining interest rates have resulted in premium increases of around 10% for permanent life insurance products, as companies try to remain competitive yet stay financially viable. The good news is that, the people in the age group who are anticipating their estate planning, aged 50 and older, may experience little or no increase in price.

Even though costs for permanent insurance may be rising, it is still a useful product for people wanting to leave a legacy. In my opinion, the risk of becoming uninsurable as one ages is a bigger concern than increasing premiums.

Permanent insurance often isn’t affordable for people having a tough time balancing budgets, so term insurance is a cost-efficient option for younger people. It’s usually better to start with a shorter-term solution that can be eased into long-term estate planning needs. Term insurance provides less expensive coverage and, most importantly, can guarantee future insurability. However, as people age, their insurance needs change. When purchasing term insurance, be sure it is a product that can be convertible to a viable permanent option without having to re-qualify medically.

Insurance isn’t a commodity someone can get in and out of at will, as they must qualify medically to be insured. In most cases, the cost of waiting, even if only two or three years, might prove costlier than any price increases. Even if interest rates start to trend upward, there will be considerable lag before it results in lower premiums.

I would caution anyone who is waiting for premiums to drop, of the need to be equally concerned about a health issue that could make them uninsurable or worse, an unexpected death, critical illness or disability with no insurance payments for dependents. We all have to remember that unfortunate and untimely things happen, and the need to protect our families, businesses or employees should we be disabled, suffer a critical illness or die.

Life insurance is a multi-faceted tool for estate planning and is designed to provide cash to pay debt, replace lost income or pay taxes that are a result of a death. Even if one has adequate net worth to pay estate and probate taxes, it can still make economic sense to buy insurance to cover those costs.

Take for instance a joint last-to-die policy, where the death benefit can be delivered for pennies on the dollar. Let’s assume a husband and wife, both age 65 have an estate tax liability of $1 million. The most cost-efficient way to pay the tax is to purchase $1 million of joint last-to-die coverage for premiums of about $18,000 a year. For a total projected outlay of about $450,000, (25 years x $18,000) the couple’s estate will receive $1 million tax-free.

Considering that the largest tax bill most of us will pay is at our death if an individual, or on the last death if a couple, life insurance could be the most cost efficient way to pay that tax bill.

There are some investment advantages as well. As the earnings within an insurance policy are tax-free, you can earn significantly higher returns compared to today’s rates of around 2.5%.

It’s easy for some financial planners to focus on devising great offensive strategies for accumulating wealth, but fail to balance them with proper defenses such as life insurance. As life can throw curves at us such as serious illness, disability or premature death, it’s important to understand the impact any of these could have on our long-term goals.

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