“Twitter-Friendly” Version.
Replace Income.
Cover Future Goals.
Pay Off Debt.
Fund a Business Transition Plan.
Maximize Pension.
Tax-Free Retirement Income.
Offset Estate Tax.
“Twitter Thread” Version.
Replace Income. Especially if you are the primary income earner, your heirs are likely depending on your income, at least for a time. For those with a single income, or where the primary earner is responsible for more than say 65% of the family income, it might be unreasonable to ask the secondary earner to go triple their income to replace what just vanished, all while grieving the loss of their spouse.
Cover Future Goals. If, while you and your spouse are alive, you want to send your kids to The Acme Amazing Academy for grades K-12, does that goal become less desirable if one of you passes away? Odds are, it becomes all the more important. How about the trip that you want to take every fall to reconnect with the family? That’s probably still important. How about violin lessons? College tuition? Helping your daughter fund that business venture? Those can (and we would say, should) still happen. Go get some life insurance.
Pay Off Debt. Do you love your mortgage? Unless you’re one of the ones that got a crazy low interest rate back in the “free money” post-pandemic mayhem, you probably want to knock out your 5% mortgage. And your widow or widower probably would love to do the same if you’re gone.
Fund a Business Transition Plan. You know one of the hardest things a new CEO will ever have to do? Come up with an insane amount of cash right after they lost their #1 business mentor, just to buy the business from the mentor’s family for the price they all know it’s worth. What are they going to do? Sell the combine? Sell off one of their most profitable business lines? Run to the bank? How about you save a few pennies back to make sure the dollars are there when they are needed.
Maximize Pension. Nearly every pension will give the recipient the option, either to take the full benefit amount for themselves, or to agree upon a reduced amount so that their spouse or heirs could guaranteed A payout for a certain period of time. The difference between these two numbers – the higher “all me, just me” amount and the lower “some for me, some for family” amount – can be repurposed to buy life insurance. If the amount of insurance it would buy is greater than what is needed to replace the pension income amount, you have instantly increased the inheritance to your heirs, charity or both.
Tax-Free Retirement Income. Since life insurance is taxed similar to a Roth IRA (funded with after tax dollars, distributions that meet certain conditions are tax-free), a properly structured life insurance policy can be a great asset in retirement.
Don’t want to wait until you’re 59.5 years old to take money from it? Great. Take it whenever you want.
Earn “too much income” to fund a Roth? Great. You don’t really*, and we can talk about that another time, but fund the life policy since your income level doesn’t affect contributions.
Want to fund it faster than a Roth? Great. Subject to the specifics of the policy, fund it faster.
Want the cash to grow a bit more conservatively, especially as you get closer to retirement? Great. You can do that.
Offset Estate Tax. If you are like many of our clients, you are either on track to owe “death tax” when you and your spouse die, or you will be on track to owe such tax once the TCJA tax cuts expire at the end of 2025 and the estate tax exemption drops roughly in half. If you know that $13 million of your estate is going to be drained away by the estate tax, this is a great time to be doing estate planning to replenish this tax hit, or better yet, finding ways of getting assets outside the estate to avoid the tax altogether. In any case, it sure would be nice for your beneficiaries not to have to liquidate anything else just to pay a hefty tax bill.
I'm sure this is not exhaustive. What did we miss? What do you have more questions about? We’re here to help.
Any opinions are those of the author and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. These policies have exclusions and/or limitations. The cost and availability of life insurance depend on factors such as age, health and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Guarantees are based on the claims paying ability of the insurance company. Raymond James Financial Services and your Raymond James Financial Advisors do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. You will be referred to a qualified Raymond James Bank employee for your residential mortgage lending needs. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.