Life insurance in retirement: Who needs it?

Estate planning may offer another exception to the KISS rule. Life insurance plays an important role in planning for families with special needs children, for example.

And protecting a surviving spouse with life insurance occasionally makes sense, notes Daily.

“You probably would think that it wouldn’t be needed for survivor protection retirement, if enough retirement assets have been accumulated to provide the necessary retirement income,” he says. “But I’ve seen some situations where there’s a gap.”

Indeed, Bajtelsmit notes that income can fall as much as one third when one spouse dies. That results from elimination of one spouse’s Social Security payment, and, in some cases, the end of payments from an annuity or defined benefit pension.

“Expenses like food, healthcare, and consumer goods also tend to fall, but housing probably does not,” she adds.

Insurance also can be useful as a tool to provide estate tax liquidity, Daily notes.

“It’s a defensible use in situations where the estate’s assets are illiquid–let’s say real estate or a business,” he says. “You don’t want to sell the assets in a fire sale, and the estate tax comes due–insurance can be used to fund the tax liability.”

Business ownership is another liquidity-related problem that life insurance can be used to address, he notes.

“Let’s say a small-business owner has several children, and only one of them is interested in taking over the business, and is good at running it,” he says. “The owner wants that child to inherit the business but doesn’t want to disinherit the others. So, he buys a life insurance policy and names the other children as beneficiaries to treat everyone equally.”

Life insurance also can be used to finance long-term care needs via a life-combination policy. The appeal is that heirs collect on the life insurance policy if you don’t wind up needing nursing home care–but that’s an appeal to emotion that misses the point of any insurance policy, which is to insure against a risk that might not actually occur.

Still, interest in these hybrid policies has been rising in concert with declining popularity of traditional standalone LTCI policies. Life-combination sales have risen fivefold over the past eight years, with 220,000 new policies sold in 2015, according to Limra, the industry research and consulting group. That’s up from just 60,000 in 2010. By contrast, just 104,000 traditional policies were sold in 2015, down from 236,000 in 2010.

Limra reports that most of the combination policies being sold (59%) are life insurance policies with chronic illness riders–an accelerated death-benefit rider that can pay out a small portion of a death benefit to fund care.

Hybrids do offer simplified underwriting, which can be a plus for buyers with pre-existing conditions who may not qualify for a traditional policy. But areas of coverage can be more limited, and so can payouts. Another appeal of hybrids is that they inoculate buyers from the risk of steep premium increases via a single upfront payment.

Michael Kitces, partner and director of research for Maryland-based Pinnacle Advisory Group, is skeptical of that argument. As he noted when I wrote about these hybrid policies in 2015, underwriters control the cash value and are under no obligation to pay a going rate of return in a rising-rate environment–instead, they can simply underpay on rates for your cash value.

“It’s an emotional response,” he told me. “I don’t want to pay $3,000 a year in premiums for a traditional policy, but I’ll give an insurance company $100,000 for a universal policy and forfeit any growth for the rest of my life.”

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