Life Insurance and Retirement
In general, the primary reason for a retiree to own life insurance is to pay for burial and funeral expenses. Typically there is no work income to protect (such as a young worker with dependents would need) unless the retiree still is working and a spouse (or other dependent family member) relies on that income. A benefit amount of $10,000 to $20,000 usually is sufficient to pay for funeral and burial expenses. For higher-asset households and those that include small-business owners, life insurance also might be needed to pay estate taxes and/or fund business transfers to surviving business partners.
Life Insurance for Retirees with Large Debts
For married retirees with large debts, owning life insurance can make sense by providing security for the surviving spouse. For instance, assume a married couple in their late 60s has a mortgage balance of $100,000 with another 15 years of payments left. Owning enough life insurance to pay off the mortgage may ensure the surviving spouse can stay in the home until he or she passes away.
Life Insurance If You Have a Traditional Pension Plan
One other situation in which owning life insurance may make sense is for a married retiree with a traditional pension plan. In some cases, the pension plan may offer a payout benefit based only on the life of a participant. This option can be selected only with the non-employee spouse's written consent. When the pension plan participant dies, the surviving spouse would not receive any continued income from the pension plan. If the participant has life insurance however, then a surviving spouse would have those funds available for living expenses after the participant dies.
A better solution to this pension situation is for a participant to choose a joint life annuity option, if it is offered by the pension plan. Although the benefit payout amount is reduced, it will cover the lives of both a husband and wife, regardless of who may die first.
In general, most individuals in their 60s and beyond will be better served by spending their resources on immediate annuities rather than life insurance. (In contrast to a deferred annuity, which is a retirement-savings vehicle, an immediate annuity is a retirement-payout vehicle.) Remember that life insurance protects you from an untimely death. Annuities protect you from running out of money in retirement, which often is a major concern for most retirees. You might think of immediate annuities as a way to provide income for life should you live longer than expected.
To make sure you have a steady, consistent stream of income, consider an immediate fixed annuity rather than an immediate variable annuity. Income from an immediate variable annuity may increase or decrease over time. Retirees looking for a source of stable and secure income typically will be better served by immediate fixed annuities.
Immediate annuities basically have two types of payment options: one version is for lifetime payments and the other is for a set period of years, such as five, 10 or 20 years. With the lifetime payout option, payments will continue as long as you live (or as long as you and your beneficiary live). When you die, the payments cease, and generally there is no “refund” to your heirs should you die earlier than expected.
With the set-period-of-years option, payments will last for that exact period of time. If the immediate annuity owner dies before the time period is up, payments will go to an heir for the remainder of the time period. If the annuity owner lives longer than the set time period, payments stop at the end of the predetermined time period.
Retirees can have the best of both worlds with their immediate annuities. Some will buy an immediate annuity with a lifetime payout and another immediate annuity with a set period of years. This approach protects your resources whether you live longer or die sooner than expected.
Some basic tips for annuity owners concerned about the safety of their money:
- Check your insurer’s rating. Using your favorite search engine, type in your insurance company’s name and “Moody's rating” or “Standard and Poor's rating.” A rating of A or better is a good sign.
- Know your state’s guaranty fund limit. $100,000 is a typical amount; if your annuity is worth more than your state’s limit, you may be at risk of losing some of your investment if your insurer gets in financial trouble. Check out www.naic.org to find your state limit.
- Buy annuities in smaller amounts from different insurers. If you own more than your state guaranty fund limit, consider spreading out your annuity purchases among different insurers. If you need to split up an existing annuity because it’s above the limit, be sure to check for early withdrawal penalties, such as surrender charges.