Ep #38 Do I Need Life Insurance in Retirement?
In this episode, Joe and Lindsay examine the nuances of life insurance in retirement. Do we really need it, or is it just another added cost?
They examine how life insurance in retirement can be beneficial in certain situations. It can be used to cover the debt, provide care for dependents, reduce taxes, and leave a legacy. For those with enough funds, life insurance can be used to enhance what is left for the next generation or charity. It can also be a great tool to keep family assets such as cottages or businesses in the family and to equalize the division of assets between beneficiaries.
What You’ll Learn in Today’s Episode:
Determine what your life insurance needs are in retirement including dependents, debt and retirement income needs.
Life insurance can enhance your retirement plan.
Use life insurance to assist with tax and estate planning.
Life insurance can enhance your legacy.
Use life insurance to assist with business succession planning.
Insurance can help with estate equalization.
Ideas Worth Sharing:
“Life insurance is a way to enhance what gets left to the next generation or charity.”
“Life insurance can be used for estate equalization, succession planning, and to reduce taxes.”
“We can use life insurance to create a lump sum that can be invested to generate some income for a surviving spouse.”
Resources In Today’s Episode:
YRPS Podcast # 27 – Maximizing Your Legacy Through Charitable Giving with Mark Halpern
YRPS Podcast # 28 – Charitable Giving in Your Community with Lesley Heighway
YRPS Podcast # 34 – Retirement for Business Owners with Bob Gauvreau
Do I Need Life Insurance in Retirement?
Life insurance is necessary if you have loved ones who depend on you when you retire. It provides financial support for your family.
Furthermore, as a business owner, life insurance aids in succession planning and minimizes taxes.
Assumptions around Life Insurance and Retirement
There is a common misconception that you don’t need life insurance in retirement. However, life insurance can still be important. Ultimately, it comes down to your personal goals and values.
Specific Insurance Needs
One scenario is retiring with debt. Life insurance is useful to ensure that you cover your debts.
Dependents
Life insurance can help you care for someone who relies on you for support. For example, a child with special needs. By leaving money in a trust, you can ensure that the person’s needs are provided for.
When One Spouse Passes
Furthermore, life insurance can help couples ensure their household income does not drop if one spouse dies. Life insurance helps the surviving spouse by creating a lump sum. In addition, this lump sum can be invested to generate income.
Meet your Retirement Goals with Life Insurance
When you retire, you can use life insurance to achieve other goals. You can reduce taxes or leave money to your family or a charity.
Using Life Insurance as a Tax Strategy
When you pass away, you may have to pay taxes on the money and property you leave behind. However, the amount owed could be substantial. Particularly if you have retirement savings or investments that have been appreciated. Additionally, your home may have increased in value over time.
To ensure that your beneficiaries receive what is intended for them, you can purchase individual life insurance. This way, the insurance company pays the taxes. Consequently, your beneficiaries receive everything that you want them to have.
Life Insurance and Charitable Giving
You can also opt to give the money to a charity instead. This way, the charity gets the money and your family pays less tax. Ultimately, this is a good way to help others and still take care of your family when you’re gone.
Enhancing your Legacy with Life Insurance
Life insurance policies provide financial protection for your loved ones. If you buy a life insurance policy for $1 million today and you die tomorrow, your loved ones will receive that money right away. One benefit of life insurance is that the money is usually tax-free.
Life Insurance and Business Owners
When business owners save money in their company, they may withdraw some of it for personal use after retirement. However, they will owe taxes on any profits the company generated during their ownership. Importantly, if they wish to share some of that money with their family or friends, they will be subject to additional tax.
Life Insurance and Taxation for Business Owners
Using a life insurance policy as a tax planning strategy involves business owners keeping some of the money they make in the company, known as retained earnings. Firstly, when the business owner passes away, the life insurance policy pays out to the company. Secondly, this payout creates a capital dividend account, which allows the money to be taken out of the company without having to pay taxes on it.
If the money is kept in the company, it may grow over time. However, taking it out as regular pay means paying taxes on it. By using a life insurance policy, the money can be taken out without paying taxes on it.
Estate Equalization
Imagine you and your sibling inherit a cottage or a business from your parents. However, only one of you wants to keep it. To make things fair, you can use life insurance. For example, if you get the cottage or business, the other can receive money from life insurance.
Sometimes, people want to keep the cottage or business in the family, but the tax can be very high. Insurance can help by providing money to pay taxes. Finally, the cottage or business can stay in the family without having to sell it or split it up.
Never Assume when it comes to Life Insurance
Just because you’re retired doesn’t mean you should cancel your life insurance policy. This is because when you have it in place, you have options. As soon as you get rid of it, you often lose your options, especially if you’re near retirement age. For instance, if you’ve encountered health issues, even if you’re generally healthy, it makes it a lot harder to get a new policy in place.
Knowing Your Specific Life Insurance Needs
Ultimately, whether or not you need life insurance in retirement comes down to your specific circumstances and needs. If you have dependents or a significant income that ends when you pass away, life insurance could be necessary to provide financial protection and that ongoing income.
If you have a large estate or own a business, life insurance can be used to enhance wealth transfer and reduce taxes.
Consider all the factors. Consult with your financial advisor or insurance specialist to determine what’s best for your situation.
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DISCLAIMER: Investment services are provided through Matthews and Associates Investments of Aligned Capital Partners Inc., an approved trade name of Aligned Capital Partners Inc © Podcast Abundance | podcastabundance.com (ACPI). Only investment-related products and services are offered through ACPI/Matthews and Associates Investments of ACPI and covered by the Canadian Investor Protection Fund. Tax planning, financial planning and insurance services are provided through Matthews and Associates. Matthews and Associates is an independent company separate and distinct from ACPI/ Matthews and Associates Investments of ACPI. Matthews and Associates are not licenced tax professionals, and you should consult with your tax advisor before acting on any recommendations.