What Retirees Need to Know About Life Insurance

By on April 20, 2021

Retirees don’t need any surprises, especially financial ones like life insurance. Some retirees don’t think about life insurance when they retire. This could be a problem if something catches them off guard, but the following information should make things easier.

Offset Tax Bill for Retirement Account Beneficiaries

Most people leave their retirement accounts to beneficiaries, but the tax that comes with this can be burdensome. If a non-spousal beneficiary inherits your retirement account, they’ll have some options, such as an extended payout, a lump-sum payout, or closing the account in a few years. A surviving spouse will have various pay-out options as well, such as rolling it over to a tax-deferred retirement account to avoid taxes, but some may not want to do this. The good thing is that if you keep your life insurance, that money could be used to pay any tax so that the wealth you leave behind feels less of a burden.

Leave an Inheritance Without Penalties

If you don’t have any retirement accounts or only have a pension that ends at death, you need to leave something else to your loved ones. This is the reason life insurance makes sense. But is life insurance taxable income?  Generally speaking, no. That makes it an ideal way to supplement survivor benefits and other monies distributed to loved ones after you’re gone.

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The Long-Term and Terminal Illness Focus

There’s no way around this one. As you get older, the chances of getting sick or needing long-term care are higher. Ideally, nothing like this will happen to you, but there is a chance. Keeping your life insurance, even if you don’t think anyone will benefit from you having it, could take care of you. Life insurance includes long-term care expenses and expenses linked to terminal illness. Both of these put you in a position where you can’t take care of yourself, so it’s a good idea to have something to set things right.

Borrowed Cash Could be Taxable

Life insurance helps you accumulate wealth without worrying about taxes. Many folks, including retirees, decide to keep this policy and borrow against it as they see fit. They know that as long as they make those payments, they can take out a small loan. The problem is some retirees don’t know that every time you take out money, you are essentially making a withdrawal. Withdrawing cash while you’re alive doesn’t follow the same rules and could get taxed, so try to keep that in mind if you’re going to be borrowing against your policy.

Better Interest Rates Than Other Options

Retirees borrow for various reasons. They may do so for investment purposes or to help someone in the family pay off debt. One thing that should be pointed out is that borrowing from an insurance policy is better than borrowing in other familiar ways. The interest rates on the cash you withdraw are much lower than what you might find with a personal loan. Most retirees don’t have a lot of disposable income, so paying high-interest rates whenever you borrow some cash is not a good thing.

There you have it. Now, you know more about life insurance and how your retirement affects it. Try to keep all of this in mind now that you’re retired and rethinking your finances.

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What Retirees Need to Know About Life Insurance