Do I Need Life Insurance in Retirement? (An Honest Answer)

The honest answer is: it depends on the job you need it to do, and for some people it is no. Here is how to tell which side you are on. The first in our series, More Than a Death Benefit.

Read the full article: https://news.americanretirementadvisors.com/do-i-need-life-insurance-in-retirement/

American Retirement Advisors helps families in Arizona and Nevada navigate healthcare, retirement income, and inheritance planning. Want to reach out? Text us at (602) 281-3898, email support@americanretire.com, or visit https://americanretirementadvisors.com.

Transcript

SPEAKER_00 0:01

Welcome to the American Retirement Advisor, coming to you from One to Three Z Studios. Real stories, real strategies, and straight talk about healthcare, retirement income, and inheritance planning. I'm Ian Schaefer, joined with Eddie and Betty. Let's get into it.

SPEAKER_07 0:16

Welcome back to the American Retirement Advisor. Today we're kicking off something brand new, a little series we're calling More Than a Death Benefit. And the very first question we want to talk through is one I think a lot of folks our age are quietly asking themselves, but maybe feel a little funny saying out loud. Which is Do I even need life insurance anymore? Like the kids are grown, the house is paid off, do I still need this thing I've been paying on for years?

SPEAKER_02 0:43

It's a great question, and honestly, it's the right question. Ian Schaefer wrote a piece on exactly this, and what I love is he doesn't start with a sales pitch. He starts with the honest answer, which is it depends. For some people, the answer is genuinely no.

SPEAKER_07 0:59

Okay, that already makes me trust it more. Because most of the time when somebody brings up life insurance, you can feel the pitch coming.

SPEAKER_02 1:06

Right. And the whole premise of the series is that most people think of life insurance as this kind of morbid bet on dying. You buy it when the kids are little and you drop it once they're grown.

SPEAKER_07 1:17

That's exactly how I always thought of it. It's the thing that catches you if something terrible happens while the family still needs your paycheck.

SPEAKER_02 1:24

And that's true. That is the reason most people first buy it. You're replacing your income if you die while the family still depends on it. But here's the thing Ian points out. That reason often expires by the time you retire. Because there's no paycheck left to replace. Exactly. If the mortgage is paid, the kids are grown, and there's no income anyone's relying on anymore, then that original reason may just be gone. So the real question isn't this vague, do I need life insurance? It's something sharper. Which is? Is there a specific job left for it to do? That's the whole frame. And the article lays out three jobs that tend to show up in retirement. If none of those three describe you, you may not need a policy at all.

SPEAKER_07 2:08

And I want to sit on that for a second because I think that's so refreshing. He actually says out loud, you might not need it.

SPEAKER_02 2:16

He does. He starts where most insurance articles won't. There are real situations where the answer is no. If your need was temporary, the kind of thing term insurance was billed for, and that need is over, then that reason has run its course.

SPEAKER_07 2:30

Now let's slow down there because I think people mix these up. Term insurance, what does that actually mean?

SPEAKER_02 2:36

Term is the temporary kind. It's low cost and it's really designed to cover a specific window of years, the years your family depends on your income. You're protecting that paycheck while the kids are home and the mortgage is big. When that window closes, the term naturally winds down. It was never meant to last your whole life. So term is the rental almost. It covers the season you need covering, and then it's done. That's a fair way to picture it. And that's different from permanent coverage, which we'll get to, because the later in life jobs Ian talks about generally need a policy built to last your whole life, not a temporary one. They're really not the same product, and that matters. Good. Hold that thought because I want to come back to it, but finish the honest part first. So the other honest piece is this: if you're older and the only goal is to build up cash inside a policy, the math gets weaker because the cost of coverage rises as you age, and there's just less time for the money to grow. That makes sense. You're starting the clock late. Right. And his bottom line is don't let anyone manufacture a need that isn't there. An honest plan is willing to look at you and say, you're fine. You don't need this.

SPEAKER_07 3:50

I love that. You're fine. Sometimes that's the whole answer. Okay, so now the flip side. The three jobs. Walk me through them because this is where it got interesting for me.

SPEAKER_02 4:01

So job one is the one that catches the most people completely off guard. And here's the twist: it has nothing to do with replacing your income. It's about your kids' tax bill, not yours.

SPEAKER_07 4:13

Wait, my kids' tax bill? How does my life insurance touch my kids' taxes?

SPEAKER_02 4:19

Okay, so this comes down to something called the Secure Act. There's a rule in there about inherited retirement accounts. When a non-spouse heir, so think your adult children, inherits a traditional IRA or a 401k, they generally have to empty that whole account within 10 years.

SPEAKER_06 4:37

Empty it the entire thing within 10 years.

SPEAKER_02 4:41

The entire thing. And every dollar they pull out counts as taxable income to them. So it's not just that they get the money, they get a tax bill on the money.

SPEAKER_06 4:51

Okay, but here's where I'd push you. Isn't 10 years plenty of time to spread that out so it's not so bad?

SPEAKER_02 4:58

You'd think so, but here's the cruel part, Ian points out. It's the timing. Your kids tend to inherit in their 40s and 50s. Which are their biggest earning years? Their peak earning years, so they're already in their highest tax bracket, probably still working, maybe putting their own kids through college, and now they've got to pull money out of that inherited account on top of their salary. So a big IRA you are so proud to leave them can land like a tax bomb.

SPEAKER_03 5:26

Oh, that's the part that gets me. You spend your whole life building this thing up to give to your kids, and the gift comes with this hidden weight on it.

SPEAKER_02 5:36

And that's where the life insurance comes in. A death benefit generally passes to your heirs income tax-free. So use this way. A policy is really just the cheapest way to hand your kids the cash to cover the taxes on everything else you're leaving them.

SPEAKER_06 5:51

So the insurance isn't replacing the inheritance, it's protecting it. It's the thing that pays the tax, so they actually get to keep the rest.

SPEAKER_02 6:26

They can actually look at your accounts and tell you whether this is even a concern for your family. The general idea is solid, but the specifics are a conversation.

SPEAKER_04 6:35

Perfect. Okay. Job two. What's the second job?

SPEAKER_02 6:39

Job two is building yourself a tax-free bucket for your own retirement. And to get this one, you have to picture your savings in three buckets.

SPEAKER_07 6:48

Three buckets. Okay, I'm picturing them. What's in each one?

SPEAKER_02 6:52

First bucket is taxable, that's the regular account where you pay tax as you go year by year. Second bucket is tax-deferred, that's your traditional IRA, your 401k, where the tax bill isn't gone, it's just waiting for you down the road.

SPEAKER_07 7:09

The bill's coming, you just haven't gotten it yet. Right.

SPEAKER_02 7:12

And the third bucket is tax-free. And for most people, that's really only a Roth. That's it. That third bucket tends to be pretty empty for folks.

SPEAKER_07 7:21

And life insurance fits in that third bucket?

SPEAKER_02 7:25

It can. The cash value inside a permanent life insurance policy, and notice I said permanent, the lasting kind, that cash value can act like another tax-free bucket. Money you may be able to get to in retirement without adding to your taxable income. And I'll say it the way the article does, that depends on how the policy is structured and funded.

SPEAKER_07 7:47

So why does having money that doesn't show up as taxable income matter so much? I mean, if I've got the money, who cares which bucket it came from?

SPEAKER_02 7:55

This is the part that really clicked for me. So many of the costs we've talked about on this show are driven by your taxable income in a given year. Think about that surcharge on your Medicare premiums, the one called IRMA, or how much of your Social Security gets taxed. Both of those go up based on your income that year. Based on the income that shows up on that line. So if you've got a source of money that doesn't show up on that line, you suddenly have control. You could pull from that tax-free bucket in a year where you don't want your income to tick over some threshold.

SPEAKER_07 8:30

Oh, so it's like having a quiet account in the corner you can dip into without setting off all those other tripwires.

SPEAKER_02 8:37

That's a great way to put it, without setting off the tripwires. That's genuinely useful. The one catch is this is a tool that works best when you started years before retirement. Not the week you retire. Not the week you retire and needs time. So this is more a wish I'd thought about this in my 50s kind of tool than a let me grab one on my way out the door tool.

SPEAKER_07 9:01

Good to know, which is honestly a reason to have the conversation sooner rather than later, even if you're not retiring for a while. Okay, job three?

SPEAKER_02 9:10

Job three is liquidity, and this one's for a specific kind of family. The families whose wealth is tied up in things that are hard to sell quickly. Like what? Give me a picture. Aaron Powell A piece of real estate, a farm or a ranch, a family business, something where on paper you're worth a great deal, but the value is locked inside the thing itself.

SPEAKER_07 9:30

Right.

SPEAKER_02 9:31

You can't exactly slice off a corner of the ranch to pay a bill. Exactly. And here's the trap: an estate can be worth a fortune on paper and still not have the cash on hand to pay a tax bill or settle the estate in the months right after someone passes. So what happens?

SPEAKER_07 9:47

I'm guessing the family has to sell something. And it's probably the very thing they wanted to keep.

SPEAKER_02 9:53

That's exactly how it goes. Families get forced to sell the ranch, the business, the land that's been in the family for generations just to come up with cash. And life insurance solves that. It's a pool of cash that arrives exactly when it's needed.

SPEAKER_07 10:08

So the ranch gets to stay the ranch.

SPEAKER_02 10:11

The ranch stays where it belongs. And Ian's honest about this one too. If your wealth is liquid and simple, mostly in accounts, this job may not apply to you at all. But if it's locked up in something you love, he says it can be the whole ballgame.

SPEAKER_07 10:27

I can feel that one. For some families, that's not even about money. That's about keeping the thing Grandpa built.

SPEAKER_02 10:34

It really is emotional more than financial in a lot of cases.

SPEAKER_07 10:37

Now, here's the part of the article that genuinely surprised me, and it's the reason the whole series has that name. This idea that the thing can actually help you while you're still alive.

SPEAKER_02 10:48

Yes, so a lot of modern permanent policies include a provision that lets you tap the benefit while you're still living, if you become chronically ill and you can't handle the basic daily activities on your own anymore.

SPEAKER_07 11:01

Wait, so the death benefit, the thing I always assumed only pays out after you're gone, you can actually use some of it for your own care?

SPEAKER_02 11:09

On many modern policies, yes. It turns a death benefit into a living one, a source of funds for care right when you need it most.

SPEAKER_07 11:18

That completely flips the picture for me. I always thought of this as the family gets it after I'm gone, and that's that. But it might actually show up for me while I'm here.

SPEAKER_02 11:29

That's the whole spirit of more than a death benefit. It can do work for you today, not just for your family someday. Now, the exact conditions in which policies have that feature, that's very much a ask an advisor detail. I wouldn't assume any particular policy has it.

SPEAKER_07 11:45

That's fair. And speaking of policies you already have, Biarticle had a piece of advice I thought was maybe the most honest of all.

SPEAKER_02 11:53

The review one.

SPEAKER_07 11:55

Yes. If you already own a policy, don't assume.

SPEAKER_02 11:59

This is so important. If you bought a permanent policy 15, 20 years ago, please don't just assume it's still quietly doing its job in the background.

SPEAKER_07 12:08

Why? What goes wrong with an old policy?

SPEAKER_02 12:11

Older policies can run into trouble when the internal cost of insurance starts rising faster than the policy actually earns. And the result is some folks are paying for coverage they don't really understand anymore.

SPEAKER_07 12:23

So it's not necessarily that it's bad, it's that it might have drifted from what you thought it was.

SPEAKER_02 12:29

Right. And the answer isn't to blindly keep it, and it's also not to blindly cancel it, it's to actually have it reviewed.

SPEAKER_07 12:36

Ian had a line about that I really liked.

SPEAKER_02 12:38

The phone. He compares it to trading in a phone you bought years ago for the one that actually fits your life now. What you own should be checked, not just taken on faith.

SPEAKER_04 12:48

And I think people avoid that because they're a little afraid of what they'll find, but not knowing doesn't make it better.

SPEAKER_02 12:55

Not knowing is the expensive part, usually. A review just tells you the truth, and then you get to decide on purpose.

SPEAKER_07 13:03

On purpose. That's really the theme of this whole thing, isn't it? So let's pull it together. If somebody's listening and they're trying to figure out which side of the line they're on, what's the honest test?

SPEAKER_02 13:14

The test is simple. Is there a job for it to do? If you want to spare your kids that tax bomb on an inherited IRA, or build yourself a tax-free bucket for retirement income, or create liquidity so your family isn't forced to sell what they love, then life insurance may have earned its place in your plan.

SPEAKER_07 13:34

And if none of those three fit you?

SPEAKER_02 13:36

Then you may genuinely not need it. And that's a perfectly good answer. Ian says it right out: the goal is not to own life insurance. The goal is to know which side of that line you're on on purpose.

SPEAKER_05 13:50

I love that because it takes all the pressure and all the fear right out of it. This isn't about buying something. It's about knowing whether there's a real job that needs doing in your plan, and then deciding with your eyes open.

SPEAKER_02 14:02

And the only way to really know is to actually look at your own situation, your accounts, your family, what your wealth is tied up in. That's not something a podcast can answer for you.

SPEAKER_07 14:13

Which is exactly the kind of thing our team works through in a planning meeting. So if any of this got you wondering, do my kids have that tax bomb waiting? Or is that old policy still pulling its weight? That's a conversation worth having. You can reach our team at American Retirement Advisors at 602-281-3898.

SPEAKER_01 14:33

And no pressure. An honest read might just be, you're fine. That's a perfectly good outcome, too.

SPEAKER_07 14:39

It really is. Next time in More Than a Death Benefit, we're getting into the cash value most people never touch and how a policy can quietly become something like your own private bank. That one surprised me too, so come on back for it. Thanks for spending some time with us today. Take good care of yourselves, and we'll see you next time on the American Retirement Advisor.

SPEAKER_02 14:59

A quick note before we wrap up. Today's episode covers financial topics for educational purposes only. American Retirement Advisors does not provide tax or legal advice. Please consult a CPA or tax professional before making any decisions based on what you heard today.

SPEAKER_07 15:17

This is Betty with the American Retirement Advisor. Thanks for listening. If this episode helped you think differently about your retirement, share it with someone who needs to hear it. You can read the full article and browse hundreds more at AmericanRetire.com. Wanna reach out? You can text us at 602-281-3898. Or email support at AmericanRetire.com. Be sure to subscribe so you never miss an episode. We publish daily. See you next time.

SPEAKER_00 15:51

Thanks, Eddie. Thanks, Betty. Until next time, this is Ian Schaefer coming to you from 123 Studios. I hope you've enjoyed this recording of the American Retirement Advisor, where we make healthcare, income, and inherence planning 223 easy.