Using Life Insurance in a Survivorship Retirement Income Strategy

You may think of life insurance as a way for people to protect assets or provide a windfall for heirs. But it’s also useful for survivorship strategies in retirement. When one spouse passes, the other is left with more than loss of love and support.

The survivor loses income from a second Social Security benefit. If their spouse had a pension or other benefit that paid income while they were alive, chances are it also goes away. Even so, there are steps you can take to protect against these risks.

One example financial plan with such strategies was once presented by Zach Parker, senior vice president of wealth management and product strategy at The Advisor Group. At one industry event, he showed how a combination of term life insurance and universal life insurance can provide income protection for both spouses.

Life Insurance and Survivorship Strategies

These life insurance concepts were used in a bucketing retirement income strategy, or where you divide your retirement into five-year to ten-year periods. Monthly income during each of those time segments comes from a dedicated bucket of money for each time period.

In Parker’s presentation, a couple falls into the “mass affluent” category. They have $400,000 of retirement savings, of which $340,000 is in qualified plans and accounts. Apart from both having Social Security benefits, the husband has a pension. Both spouses are 60 years old, and the wife expects to continue part-time work in retirement for another 5 years.

This couple could, of course, work for a few more years and delay taking Social Security benefits. That would also increase the amount that the husband will get from his pension.

But the couple asked Parker to see whether he could come up with a plan that will allow the husband to retire now and the wife to work only part-time for another 5 years. They also don’t want to have to tap into their home equity to do this.

The Widow/Widower Dilemma

When a spouse dies, the survivor faces challenges on multiple fronts, including loss of income sources. Since women tend to live longer than men, they often come across this hard situation.

There is the lost Social Security benefit. If the deceased spouse had a pension, a reduced or eliminated benefit payout might apply. Furthermore, leftover retirement savings may be taxable upon withdrawal, so more money is needed to pay for this expense.

These factors combined can often result in an overall reduction in benefits of up to 50% for the surviving spouse. Furthermore, it may happen when the surviving spouse is ‘too old’ to rejoin the workforce – or at least in a full-time capacity.

But proper planning using life insurance in a survivorship strategy can help many survivors avoid these risks. This planning can give a couple the assurance that they will have enough income to at least cover their vital expenses.

Time Segmentation

In the presentation, Parker’s Income for Life Model (IFLM) divides the couple’s lives up into 5-year segments, or income buckets. A segment of the couple’s assets is designated to pay out at each specific bucket.

At the beginning of each bucket period, the assets that were earmarked for that bucket are liquidated and placed into short-term fixed income offerings.

While critics say that a bucket strategy can create timing problems and need ongoing changes, it can help retirees feel more certain about the future with a ‘simple’ strategy. They can rest easy knowing that they have a plan for every stage of their retirement.

Parker’s plan allowed the couple to protect their income with a combination of term policies and a guaranteed universal life policy. The term policies will provide $125,000 of coverage while the universal policy’s death benefit is $150,000.

For the first 20 years of retirement, the wife would receive $275,000 if her husband were to pass away before she did. Then, the term policies would be dropped, and the total amount of coverage would drop to $150,000 from the universal policy after 20 years.

The total cost for these policies comes to about $400 a month, which the couple can afford. Parker had initially recommended that the couple purchase $500,000 of life insurance on the husband.

But the husband had objected to that, saying that the cost of the premiums would be too high. Parker compromised and used the policies described above instead.

Contingency Plans for When the Unexpected Happens

Although a retirement outlook can seem fairly secure on paper, life has a way of throwing us unexpected curveballs that can disrupt even the best-laid retirement plans.

The couple may still need to tap into their home equity to pay for long-term care expenses or else buy some sort of long-term care insurance.

Let’s go back to the life insurance coverage. It may make more sense for them to buy a permanent life policy that has accelerated benefit riders that can be used to pay for long-term care expenses. This way they are guaranteed to get something out of the policy, no matter what happens.

While this rider will come at an additional cost, it can be much cheaper than having to pay for a whole separate long-term care policy. Alternatively, say that they do buy a long-term care insurance policy.

If they never need to use the coverage, then that is money lost that they can’t recoup. But a life insurance policy with those benefit riders is guaranteed to pay back something: the cash value in the policy, the death benefit, or the long-term care benefit.

Accelerated benefit riders allow policy owners to insure themselves against several types of risk, such as disability, long-term care, and death.

Proactive Planning and Guarantees to Beat Back the Uncertainties

Retirement planning today involves dealing with “the known knowns, the known unknowns, and the unknown unknowns” (as a Defense Department official once famously said).

It involves several variables that can’t always be fully counted on. Therefore, it may need to be changed many times over the course of time.

Our example couple still has other issues to consider, such as whether to tap into their home equity, assume a greater level of investment risk in their portfolio, or make other changes that can impact their plans.

Consult your financial advisor today to explore survivorship strategies, and other strategies that can bring you more peace of mind for retirement. Looking for a financial professional to help you with your retirement what-ifs? For your convenience, many experienced and independent financial professionals are here at SafeMoney.com to serve you.

Get started by visiting our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to discuss your goals, needs, concerns, and overall situation and explore a potential working relationship. Should you need a personal referral, please call us at 877.476.9723.