Whether you are just starting out, in your peak earning years, or enjoying retirement, your insurance protection needs may change. Life cycle planning helps identify insurance needs that are common to particular stages of life. This can help individuals and families to examine their particular insurance requirements and plan for their unique needs.
Starting Out
Between the ages of 25 and 35, many people are just starting out in life—getting married, establishing families, and building careers. During these years, the death of the primary breadwinner, or one partner in a dual-income couple, could seriously jeopardize a surviving spouse’s or family’s financial future. Young couples probably have not had time to accumulate significant assets. For those in this age group, life insurance can be used to help create an "instant estate." In the event of an unexpected death, a life insurance policy death benefit can help provide a continuing source of income, pay off a mortgage, or help fund a child’s college education.
The Peak Earning Years
Between the ages of 35 and 55, a family’s assets may increase, thus changing their life insurance needs. At this point, individuals owning term policies may wish to convert to permanent insurance. Permanent insurance offers the potential for tax-deferred cash accumulation. The cash value can be accessed through a policy loan, free of taxes or penalties up to the amount paid into the policy. The loan interest rate generally is comparable to traditional lending rates. However, it is important to note that any policy loan that is outstanding when the insured dies will reduce the policy’s death benefit amount. Policy loans and/or withdrawals also will reduce the cash surrender value and may reduce the policy death benefit. Taking a policy loan could have adverse tax consequences if the policy terminates before the insured’s death.
Another concern during this period is protecting one’s ability to earn income. According to the Life and Health Insurance Foundation for Education (LIFE), before the age of 65, roughly three in ten Americans will sustain a disability that lasts three months or longer. What’s more, nearly one in five Americans will be disabled for one year or more during their working years (LIFE, 2009). Since even one year of disability could easily wipe out many years of savings, it is important to plan ahead with individual disability income insurance.
Some life insurance policies offer a rider, called a waiver of premium (may be available at an additional cost). With this additional coverage, if the insured becomes disabled, the insurer will pick up the cost of the premiums with no repayment required. Thus, despite a disability, the insured’s life insurance coverage won’t be affected.
Nearing Retirement
As retirement approaches, you may begin to prepare strategies to minimize your estate taxes. Life insurance offers a practical and affordable means of creating liquidity at death to help pay estate taxes. One approach is to establish an irrevocable life insurance trust (ILIT). When properly executed, the trust is used to purchase a life insurance policy in an amount at least equal to the projected estate taxes. The policy premiums are paid with gifts from the insured to the trust. At the insured’s death, the trust provides tax-free funds to help cover the estate tax liability.
The Retirement Years
Upon retirement, there will probably be different concerns. Personal assets that have taken years to accumulate could be quickly depleted should an individual or loved one require long-term care. Most people are unaware of the actual costs associated with long-term care. According to a survey of Americans age 45 and older conducted by the American Association of Retired Persons (AARP),¹ only 8% of respondents could estimate the cost of a nursing home stay within 20% of the national average; 17% did not know the cost; and 63% thought it would cost less than it actually does: $75,192 per year. Furthermore, only 17% of respondents could accurately estimate the average monthly cost for assisted living: $2,968.
Although Medicare generally begins at age 65, it does not cover most long-term care services. Because it is a government program designed to help those in financial need, individuals must "spend down" their personal assets and meet the Federal poverty guidelines before qualifying for assistance. Once savings and assets have been reduced, he or she may qualify for nursing home care under Medicaid. Long-term care insurance is just one option that can help you cover long-term care expenses before you, or a loved one, become eligible for Medicaid. Long-term care insurance may allow you to keep more of your savings, while also alleviating the financial and caregiving burden on family members.
Planning the Future
An appropriate insurance protection plan can help provide confidence throughout life’s key stages. By understanding the concerns that are common at each life stage, individuals and families may be in a better position to anticipate their needs and plan accordingly. $
¹ AARP, "The Costs of Long-Term Care: Public Perceptions Versus Reality in 2006," http://assets.aarp/center/health/ltc_costs_2006.pdf (accessed March 2010).
Copyright 2010 Liberty Publish- ing, Inc., Beverly, MA. The opinions and recommendations expressed herein are solely those of Liberty Publishing, Inc., and in no way represent advice, opinions, or recommendations of the Financial Planning Association, its affiliates or members. CFP™ and CERTIFIED FINANCIAL PLANNER™ are federally registered service marks of the Certified Financial Planner Board of Standards (CFP Board). This summary does not constitute legal and/or tax advice and should only be relied upon when coordinated with a qualified legal and/or tax advisor. April, 2010. Current tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the particular set of facts and circumstances. The information contained in this newsletter is not intended as tax, legal, or financial advice, and it may not be relied on for the purpose of avoiding any Federal tax penalties. You are encouraged to seek such advice from your professional advisors. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Written and published by Liberty Publishing, Inc. Copyright © 2010 Liberty Publishing, Inc.