Desk Report

21 October, 2023 02:32

Should I keep my life insurance after I retire?

The decision to keep a life insurance policy after retirement is contingent upon your family and financial circumstances. While many retirees opt to cease paying life insurance premiums when they no longer have young families, there are several factors to consider before making a decision.

Life insurance is designed to safeguard your spouse and children in the event of an unexpected demise. However, if you have financially independent adult children and sufficient resources to cover your retirement costs and those of your spouse, the necessity for ongoing life insurance may be minimal.

Conversely, if you had a child later in life or have a dependent relative with special needs who relies on your income, it may be prudent to continue paying the premiums on your policy.

Additionally, it is crucial to ensure that your spouse's retirement income will not face a significant reduction upon your passing. Assess the conditions of your pension or annuity to determine the survivor's benefit, and take into account the potential loss of Social Security income. If you find that your spouse stands to lose a substantial portion of income, retaining the policy can help mitigate the shortfall.

If you still have mortgage payments or other significant debts, it may be advisable to retain your policy in order to assist your family in paying off these obligations after your demise. However, if your debts constitute a small portion of your net worth and pose no risk of financial adversity, life insurance may not be necessary.

Since life insurance serves to replace lost income for your family in the event of your death, you may want to maintain your policy if your spouse or other family members depend on your income. However, if your retirement job provides minimal income, it is likely unnecessary to continue with the policy.

Estate taxes:
Life insurance can also serve as an estate planning tool if you possess a sizable estate, exceeding $12.92 million in 2023. If you own a substantial business that you desire to preserve within the family and lack sufficient liquid assets to pay estate taxes, the proceeds from a life insurance policy can assist your heirs in meeting these tax obligations upon your demise.

To aid in your decision-making process, consider consulting with an estate-planning expert or a fee-only financial adviser who can assist you in weighing the advantages and disadvantages.

Sell or Swap Your Policy:
If you determine that you no longer require your life insurance policy, you have the option to surrender it for its cash value or allow it to lapse. Another alternative is to sell your policy in a "life settlement" transaction to a third-party company, which often offers a higher payout than the policy's cash-surrender value.

If you are interested in exploring this option, obtain quotes from multiple life settlement providers or brokers within your state. Certain states have directories that contain licensed providers, and it is advisable to verify this information with your state's insurance department.

Alternatively, you may opt for a tax-free Section 1035 exchange, wherein you exchange your policy for a hybrid product that combines life insurance with long-term care insurance coverage. These products come in various forms, often blending a whole or universal life policy with a long-term care rider. If you do not utilize the long-term care coverage, your heirs will receive the death benefit.

Donate Your Policy:
Should you choose to make a charitable contribution of your life insurance policy, the tax deduction you receive will depend on whether the policy has accrued value beyond the premiums, as well as whether the policy is paid up or if there are remaining payments. In order to qualify for an income tax deduction, the donor must irrevocably transfer ownership of the policy to a nonprofit organization. This transfer necessitates relinquishing all incidents of ownership and rights in the policy. An outright gift of a life insurance policy will yield a charitable income tax deduction equivalent to the lesser of the policy's value or the donor's basis in the policy. Refer to Sec. 170(e) and Rev. Rul. 78-137 for further information.

In general, the donor's basis in a policy equates to the total amount of premiums paid. As a practical matter, the charitable income tax deduction will typically equal the donor's basis since the cost basis usually does not exceed the policy's value, such as its replacement cost or interpolated terminal reserve value (ITRV).

আপনার মন্তব্য