About half of adult Americans have a life insurance policy, and more say they’re interested in purchasing one. But needs can change later in life when children grow up, and a retirement nest egg seems big enough to absorb financial shocks. Those nearing and in retirement may see less need for their life insurance policy than when they first bought it and may see the premiums they pay as burdensome. Clients who visit our Beck & Lenox Estate Planning & Elder Law office often ask our attorneys, “Should I keep my life insurance policy”?
Kiplinger’s recent article entitled “Other Uses for Life Insurance You May Not Know About” says that the tax benefits of a life insurance policy are potentially even more valuable now that the “stretch IRA” is no longer available to most of us. In 2019, the SECURE Act eliminated the stretch for most non-spouse beneficiaries. With limited exceptions, non-spouse beneficiaries can no longer “stretch” out RMDs (required minimum distributions) over the course of their lifetimes. Now, most non-spouse beneficiaries must withdraw their inherited tax-deferred retirement accounts within 10 years of the original owner’s death. This may result in an increased tax burden and a faster end to the tax benefits of the inherited account.
However, life insurance proceeds paid to beneficiaries are generally income tax-free, and some use life insurance to help transfer wealth to the next generation. Life insurance policies can provide business owners additional opportunities, such as paying off business debt, funding buy-sell agreements related to someone’s business or estate, or funding retirement plans.
It’s also estimated that 70% of Americans 65 today will need long-term care at some point, but many Americans nearing and in retirement don’t have long-term care insurance. Many people who do want to plan for long-term care costs may not want to invest in traditional long-term care insurance, because premiums can rise a lot, and there are typically no benefits if the owner ends up never needing long-term care.
An alternative option to long-term care insurance is to use a life insurance policy with long term care benefits. These combine the benefits of long-term care insurance with those of permanent life insurance through the purchase of an optional rider. They can still provide a death benefit if the owner passes away without having needed long-term care. If the owner does need long-term care, a certain amount of money or time is allotted to cover costs. If this amount isn’t used, some policies can offer a “return of premium” guarantee upon death or termination of the policy. If a remaining amount is passed on, beneficiaries may be able to enjoy it tax-free.
There are a number of potential benefits to life insurance beyond its traditional use when creating a retirement or estate plan. So if you are asking yourself, “Should I keep my life insurance policy?”, consider these good reasons to do so. If you are particularly concerned about the need for future long-term care, talk with an elder law attorney about how life insurance may help. Some of Beck & Lenox clients have had very positive feedback about policies with long-term care benefits.
Reference: Kiplinger (July 21, 2021) “Other Uses for Life Insurance You May Not Know About”