One of the big questions that comes up for people that are getting to retirement or already in retirement is, "Hey, do I need my life insurance policy anymore after I'm retired?" We know why we use it earlier in our life, right, to protect ourselves, protect our family, in the event that something happens. But what about in retirement? Is it still necessary to carry that insurance? That's what we're talking about today with John Stillman and Jake Dozer, the planning team at Rosewood Wealth Management.
So, Jake, I'll start with you, but this kind of idea before you really dive into whether or not you need Life insurance. Why does life insurance kind of get this negative connotation? Right, it's kind of a bit of a dirty word for a lot of people.
Well, I think number one, it's associated with our own mortality, right? Nobody wants to think that one day they won't be here. The second of all is it's oftentimes sold and not bought, which is something I've said before about insurance. You know. To a hammer, every problem looks like a nail.
To a life insurance agent, every person looks like a purchaser of life insurance. And so, to that end, I don't think it's unwise for folks to be wary of it in general. But I also think that it's important to recognize its utility, right? Just like we would use insurance in any other area of our life. The catastrophic events that could befall us and negatively impact our loved ones should be appropriately insured against, and so insurance, at its base form, is shifting my liability from myself to an insurance carrier.
Who in exchange is charging me a little bit of money, but I get a lot of peace of mind and I can put a lot of fears to bed.
So I don't think it's evil in of itself, but it's something that should be used judiciously. I think that more often than not, people are probably underinsured than they are overinsured. But I think because there's so many different types and the way you get it is through this like process where somebody makes a commission. There's there's this leeryness of it. I get it, but.
If if you just stay there in the process and choose not to insure yourself because of it, you're kind of missing the forest for the trees. Just because you should be leery about the way you go about it, doesn't mean you shouldn't pursue it. Just means you need to educate yourself and use a trusted source. All right, John.
So obviously, there's never a yes, you definitely need it. No, you don't need it. There's always case by case basis when you do your planning with people at Rosewood.
So take me inside, kind of how you help determine whether or not someone needs life insurance at all. Yeah, well, if you think about the use of life insurance before you're retired. More often than not, ninety some percent of the time, you're using that life insurance for income replacement. If I'm gone, how do I protect the spouse and kids economically? If I'm not here to earn an income anymore, like for the most part, that's how life insurance is being used when you're in your working years.
Once you retire. And we're no longer dependent on your paycheck.
Well, now we're not necessarily using it for income replacement, although we might be. Think about it. Let's say you have a pension that dies with you. You didn't take any spousal continuation benefit on that pension. We know that at least one of the two social security benefits is going to go away.
When one of the spouses dies, so there's some income that's going to go away at the death of the first spouse. The question is, does the remaining spouse need to make up that income, or will they be fine with you know a lesser income? As just a single person, maybe that's where we have to dive into the income plan to see. But that—that's question number one: Is are we going to need to replace some of your income when you die? Even though it's not a paycheck, it's a different form of a paycheck, but it's still income that we might need to replace.
So that's question number one: Do we need to replace income or not? Number two is: Are there some estate planning uses for this life insurance? I mean, one of the great benefits of life insurance is. The death proceeds go to the beneficiary tax free, and this dates like all the way back to the Great Depression, when life insurance companies essentially bailed out the federal government in the Great Depression and kept the United States as we know it afloat. And the deal that was struck then was life insurance proceeds from this point forward are going to pass tax free.
So we're almost a hundred years into this being the case. Because of that benefit, there are some handy little estate planning uses for life insurance. It's a great way to pass money tax-free to the next generation. And so, if you're worried about what the taxability of your estate might look like, you might want to have life insurance as a component, if nothing else, just so that there's a little bit of tax-free money in there. For your heirs, for your beneficiaries, to handle things, to clean up things, to get the house sold, to do whatever they have to do in managing your estate, you might want to have a little bit of cash there available to them that they know is coming in tax-free to help them manage all the rest.
Last thing you want to do is leave somebody a hundred-acre farm and no liquid assets, and they can't even pay the property taxes on the farm long enough to get it sold. And then you're in a hurry to sell the farm, and then what happens when you're in a hurry to sell something? You don't get the best deal that you could. You have to cut the price to get it gone.
So this is where we have to assess your situation and figure out, like, yeah, there might be a use for life insurance. It may or may not still be for income replacement as it used to be earlier in your life, but it's at least worth a conversation. All right.
Well, then. Part two that is, you know, hey, I know you mentioned this, Jake. A lot of people maybe have less insurance than they need in general. But how do you actually determine how much you need? If you do say, okay, I do want to hang on to life insurance and retirement, there are some different ways to use it.
How do you actually figure out how much you need?
Well, we take folks through a process, and to your point, you know, there's an element of There's there's a few different tiers of what are you looking to accomplish with life insurance.
So as John mentioned, the first thing is income replacement. If I pass away tomorrow, how much of that income is my family going to be reliant upon?
Well, in my case, my wife and I just have had a baby. He's going to be five months old this Friday. What that means is that she's staying at home, which means that 100 of the income I make needs to continue. Which translates to: I need enough life insurance to be able to get her at minimum through these years where she can't work, or pay for childcare so she can work. Probably need to set aside some money so that she could grieve.
If the income amount isn't possible, maybe I need to set aside some money so she can pay off the mortgage, so the income need is lesser. Right then, that would sort of be tier one responsibilities. Tier two would be. Hey, is it an aspiration of mine to set aside money that I haven't set aside already to fund my kids' college, or to give them some sort of wedding gift, or to make sure that beyond age eighteen, my wife has the funds to be able to continue to live her life if that's a goal? But certainly, those are extras; those aren't baseline expenses.
But they're things like that, and then you know that's sort of that accumulation phase, like John was describing. Then you retire. And then the calculus is a little bit different. You're working backwards almost. You're working towards well, how much of my income could my assets replace, and.
If it's only eighty percent of the income I need, well, then we need to make up the difference with life insurance, or and then sort of phase three is that estate planning, like John mentioned. You know, I worked with a client who had a net worth of nearly twenty million dollars.
Well, what that translated to, and this is certainly not the everyday person, but it's that high net worth or private wealth person that's listening today. And maybe you're in a place where you're above the federal estate tax threshold, where the amount of money. You have would actually trigger not only income tax but estate tax to the next generation, or on your estate before they receive the money. In which case, we need a way to be able to get money out of your estate. And get it to the next generation to either pay that tax bill or make up the money they paid in taxes.
So that's an example where we might have, let's say, the estate tax threshold is sitting between sixteen and seventeen million dollars. Let's say their net worths eighteen million.
Well, maybe one of the strategies one who employs is how do we chip away that eighteen million by paying insurance premium. But then, how do we replace that money on the back end by funneling that insurance premium into an insurance policy that pays a death benefit, right?
So today's subject is not a nuance, but rather there's these different grades, and based on your circumstance, will dictate what's the best way for us to tackle life insurance needs or the lack thereof in your specific case. Yeah. Bottom line is, it's just another one of those questions that we need to. Understand how it fits into your plan, right? There is no yes.
Everybody who retires needs to have this policy in place. There's also no all right. Once you retire, go cancel all your life insurance. That's just right. It's just not that cut and dry.
There's a lot of nuance in this, and we need to understand what works best for you. And there honestly could be options where we might say, okay, here's a way we could solve this problem with life insurance, and here's a way we could solve it without. Either one will work. You pick the path you want to take.
So there's no black and white to any of this. Let's make sure that we have plan that's right for you. Thanks for tuning in. We'll talk with you again soon. Carolina Wealth Stewards, doing business as Rosewood Wealth Management, is a registered investment advisor in the state of North Carolina.
The material presented is intended to be general information and should not be construed by any consumer as the rendering of personalized investment advice.
