When Life Insurance May Factor Into Your Retirement Plan

“Hey Mike, do I need life insurance in retirement?” Discover when life insurance may make sense in retirement and when you should steer clear.

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What is How to Retire on Time?

Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.

Mike: 00:05

Welcome to how to retire on time, a show that answers your questions about all things retirement, including income taxes, Social Security health care, and more. This show is an extension of the book, How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com. My name is Mike Decker. I'm the author of the book, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to finance, we can pretty much talk about it all. Now that said, please remember this is just a show.

Mike: 00:35

Everything you hear should be considered informational as in not financial advice. If you want financial advice, personalized financial advice, then go to www.yourwealthanalysis.com. You can request your wealth analysis from my team and me today. With me in the show today is mister David Fransen. David, thanks for being here.

David: 00:53

Well, I'm glad to be here.

Mike: 00:54

Yeah. Yeah. David's job is gonna be reading your questions that you submitted, and I'm gonna do my best to answer them. You can submit your questions right now by texting us at [phone]. Again, that number is [phone], or you can email them to us at [e-mail].

Mike: 01:14

Let's begin.

David: 01:17

Hey, Mike. Do I need life insurance in retirement?

Mike: 01:21

That's a tough question to answer.

David: 01:23

Uh-huh.

Mike: 01:23

You know how we have a disclosure? This show is not financial advice. Yeah. It should be on an individual basis. Let me start by saying this.

Mike: 01:31

Life insurance is not an investment. It's not. Insurance in its purest form is transferring risk to an insurance company when the odds are not in your favor of a certain event happening.

David: 01:46

Right.

Mike: 01:46

So let's let's break down different types of life insurance that may be a part of a a retirement plan. You got term life insurance. You've got whole life insurance. You've got universal life insurance. You've got long term care insurance.

Mike: 02:01

And then there's the whole health care world, but we won't go there for the time being. Okay? So let's first start. Do you need term life insurance? I don't know.

Mike: 02:09

Maybe. If one person were to pass, would it be devastating for the surviving spouse? If the answer is yes, then maybe it may but it might not make financial sense either. The premiums might be really high.

David: 02:22

Mhmm.

Mike: 02:22

So you have to compare the two. The only way I've really seen life insurance really make sense is when you have a 60 year old, who wants to delay their Social Security till 70.

David: 02:32

Okay.

Mike: 02:33

And so they have term life insurance just because they don't wanna feel like they've missed out if they were to pass before 70 years old because they're giving up income for that period of time. But they're paying a premium for it.

David: 02:45

Yeah.

Mike: 02:45

So it's, again, not an investment. They're just they they want that peace of mind or they wanna transfer the risk to the insurance company knowing that the odds are probably, they're never gonna get that death benefit with term. Yeah. But the peace of mind they're willing to pay for.

David: 03:00

Right.

Mike: 03:00

That's one of my favorite, I guess, elevator pitches or hit you know, he asked, what do you do for a living? When they say I'm in the peace of mind business Uh-huh. They sell insurance. Okay. That's Yeah.

Mike: 03:11

That's how it works. Mhmm. Because you're buying peace of mind. You're buying something that's probably not gonna happen, but could happen. K.

Mike: 03:20

That that's how I see term life insurance. If you've already saved up enough for retirement, you probably don't need it. But I wanna be fair and try and explain both sides of the equation.

David: 03:32

Yeah. And if you're a young person listening, you probably do want term. Right?

Mike: 03:35

If you're Please get term life insurance.

David: 03:37

Thirties, forties.

Mike: 03:38

Well, if you're single and you've got no responsibilities, then Yeah. You might not need term life insurance. Uh-huh. Right? But if you're married and you're starting a family

David: 03:46

Yeah.

Mike: 03:46

Then your death would be significant in the devastation of the spouse who now has kids and has to figure out how do I work, how do I raise the kids, all of that. So that's when you shop term life insurance. And, please, don't start a family without term life insurance. Yeah. I find it highly irresponsible.

Mike: 04:03

I've heard of too many stories to where the surviving spouse with their kids was devastated, and you just set them up for a rough time. Life insurance when you're young is cheap. Please don't gamble, your life in that way or the surviving spouse. And I would even say, make sure that you have life insurance on the mother and the father or whatever the spousal situation is because the mom might not have an income, but is working as if there's an income there.

David: 04:31

Mhmm.

Mike: 04:32

Because you now have to replace childcare. You have to I mean, all sorts of things. So Yeah. This is more about retirement, but thank you for bringing that up. It's very, very important.

Mike: 04:40

But at some point, I think that there's a threshold to be crossed. Maybe you're at term life insurance, but if you start going into cash value insurance

David: 04:48

Okay.

Mike: 04:49

So cash value insurance, the way I look at it, whole life insurance is where you basically fund it over a period of time to where the cash value can support a death benefit in perpetuity. So you're paying a certain amount of money over the years. I don't know. Maybe ten years or whatever it might be, however you structure the policy. And then you have this death benefit.

Mike: 05:06

So if you were to die sooner, the death benefit's there. But if you were to die later, at least the premiums kinda stopped at some point Okay. Depending on how you structure. A lot of variabilities here. But or you've got indexed universal life insurance where you're putting money into it.

Mike: 05:20

There's a cash value. The fees are all upfront. So the the growth from a cash value stinks. Mhmm.

David: 05:26

But

Mike: 05:26

there's a death benefit there. At some point, then the fees drop, and you can grow that cash value to be used as income. But if you die, there's also a death benefit. So it's kind of a a nice hybrid dual purpose version of life insurance. Okay.

Mike: 05:40

I'm personally a fan of having the cash value be a bond fund substitute because it can grow. You can spend it. There's a death benefit associate. So there's a bit of a hybrid. I think it can make sense for a lot of people, especially in their forties or fifties.

Mike: 05:54

If they can start funding it early. Mhmm. When they get to retirement, then you can do all sorts of things to grow that money and have it as a tax free income source.

David: 06:02

Okay.

Mike: 06:03

Yeah, man. We are we are nerding out here on a few things. The next one that I wanna wanna talk about when it comes to life insurance is long term care.

David: 06:11

Okay.

Mike: 06:11

So long term care right now, I think it's $315,000 in today's dollars. So not accounting for inflation is what the average retiree would spend if they go into a long term care facility. And you might live two, three, four years. So there's averages about a hundred and some thousand dollars a year in total expenses. If you go to a long term care facility, you're not spending money going out to eat or going on vacation.

Mike: 06:34

Right? So there is a budget adjustment to it. But all things considered, it may not be super detrimental, but you wanna make sure you have the assets available to you. Now I I'm licensed to sell long term care. To date, I've never actually sold a policy.

Mike: 06:51

And the reason why is I like to look at it as follows. If you were to put x money in a long term care policy and then use it, how much cash would you get out of the policy over a three, four, or five year payout? And then if you put the same amount of money in the market, and let's assume a six to seven percent return, what would the total amount of money how much money would you have to work with at that point? Are you with me so far?

David: 07:18

Yeah. Yeah. Yeah.

Mike: 07:19

I'm just looking at cash benefit right here for for what long term care has evolved into being. Because long term care isn't like it used to be with the traditional long term care policies for life and the ongoing premiums forever. It's different today. Insurance carriers hate long term care, like traditional long term care because it's so expensive to them. So they try to get rid of it.

Mike: 07:38

So now you've got asset based long term care. You're really looking at if you put x amount in, you'll get x amount back if you qualify for long term care. So the reason why I bring this up is when I just look at a basic breakdown of cash value, more people are willing to say, I'm willing to risk it and not and and I don't believe I'm gonna get sick over the next ten to fifteen years. Yeah. So I'd rather just try and grow the cash, and they're willing to take on the risk themselves.

Mike: 08:04

Right. They're focused on their health. They're focused on the various things that can lower their risk of need long term care. K? They're not saying I won't have long term care.

Mike: 08:15

They're just acknowledging a cash to cash comparison analysis. Yeah. They're not asking me to speak at long term care conferences anytime soon. The point of this is if you were to need long term care, let's say five years in after you bought a policy, yeah, you're getting a better return on your investment. But it's not really an investment.

Mike: 08:35

It's insurance. Yeah. And the odds you basically had an improbable situation happen to you. Insurance works when you pull a bunch of people together that have a low probability of a specific event happening so that the few people that experience that event can get paid out while everyone else lives their life and pays into it and maybe Yeah. Didn't get as much money back as they could.

Mike: 08:57

But that's what insurance is. Yeah. Let's call it for what it is.

David: 09:00

It's interesting to think of it in that sort of context or to illustrate it in that way because we don't ever think about it.

Mike: 09:05

Well, I mean, in the health care industry right now, people are so upset with insurance companies. They don't understand. You're not gonna pay into an insurance policy and then get more services from your doctor every single time. You get your money back when the improbable happens to you. Insurance is priced so that the probability is in their favor.

Mike: 09:27

That's how insurance is sustainable. I don't think enough people understand that.

David: 09:32

Right.

Mike: 09:32

Insurance is not an investment. Yeah. Insurance is that an unlikely situation you hope doesn't happen happens to you. But because you paid the premiums for your peace of mind, you have that benefit.

David: 09:44

Alright.

Mike: 09:45

So is life insurance good for a retiree or a retirement plan? It depends on what risks you're willing to pay an insurance company to inherit for you. This is why annuities are an insurance product.

David: 10:00

Right.

Mike: 10:00

So you buy an annuity, you turn on guaranteed income for life. With the insurance company, you know, you're probably gonna die at a certain age, so the odds are in the insurance company's favor. But if you happen to live long enough, then, okay, you've transferred that risk to them. Yeah. It's not investments.

Mike: 10:15

It is risk transference. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist.

Mike: 10:35

Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date. Go to www.yourwealthanalysis.com today to learn more and get started.