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Do you remember buying a life insurance policy many years ago to protect your loved one? A mere half of adults have a life insurance policy. More are interested in buying one. But, as the children get older, your needs may change and your retirement nest egg might be able to absorb financial shocks. People nearing retirement might not see as much need for their life insurance policy and may view the premiums as too burdensome.
How to pre-fund a legacy so you can enjoy your retirement guilt-free
There are many benefits to purchasing life insurance policies or continuing them in retirement. These include long-term care, taxes, estate planning, and tax planning. These are just a few of the many benefits you might not be aware of when using a life insurance policy.
What are the tax benefits of life insurance?
A life insurance policy can provide tax benefits that are even greater than the “stretch IRA”. The SECURE Act (Setting Every community up for Retirement Enhancement) in 2019 eliminated the possibility for non-spouse beneficiaries of stretching out RMDs (required minimal distributions) throughout their lives. Most non-spouse beneficiaries will have to drain tax-deferred retirement funds within 10 years of their original owners’ death. This could result in a higher tax burden or a quicker end to the tax benefits from the inherited account, depending on the amount of money that is in the account.
Life insurance proceeds are generally exempt from income taxes. Some people should think about life insurance as a way to transfer wealth to the next generation. Business owners have additional options, including the ability to pay off debts, fund buy-sell agreements, and funding retirement plans.
What are the long-term care benefits of life insurance?
According to estimates, 70% of Americans 65 and older will require long-term care. The average annual cost of an assisted living facility is $51,600.
The annual cost of a private room at a nursing home costs more than $105,850. Many Americans are not covered for long-term care when they reach retirement. People who want to save money on long-term costs might not be able to afford traditional long-term insurance. The premiums can go up and there are usually no benefits if they don’t need long-term.
Myth: Taxable Life Insurance
Long-term care insurance is becoming less popular over the past decade. A life insurance policy that includes long-term care benefits is an alternative. These policies offer the combination of the benefits of permanent life insurance and long-term care insurance by purchasing an optional rider. If the owner dies without having required long-term care, they can still provide a death benefit. A set amount of money or time can be allotted to the owner if they require long-term care. Some policies offer a “return-of-premium” guarantee upon the death or termination of the policy, if this amount is not exhausted. The policy may allow beneficiaries to receive the remaining amount tax-free if they pass it on.
This type of life insurance policy has no premium increases, unlike traditional long-term care insurance. Some policies require lump-sum payments to be purchased at the beginning, which can make it difficult for people to purchase a policy.
The bottom line
Your financial planning needs will change as you get older, but that doesn’t mean your life insurance policy should be outdated. Life insurance has many benefits beyond what you might expect. An expert can help you understand the details of your policy and determine if these strategies might be applicable to your financial plan.