Yesterday, I had the opportunity to meet with a couple. (I don’t want to use their real names, so I will call them “Bill” and “Sarah”.) Bill was 63, while Sarah was 62, and they came to me because they wanted to start planning for their retirement. When I asked them when they planned to retire, they said “well, that’s why we are here.”

Sarah already retired a couple of years ago. However, Bill was still working, and he said “if I could retire tomorrow I would. I’m ready!”

The focus of our planning discussion was on creating a retirement income plan to provide them the income that they needed for the rest of their lives. They weren’t sure if Bill could retire today — or if he should plan to continue working longer. They also weren’t sure how much income they could reasonably expect to live on for the rest of his life. Since they are both healthy, and both of their parents lived a pretty long life, it made sense to plan for at least a 30-year retirement.

Including a Life Insurance Policy in the Plan

Throughout the course of our discussion, Bill shared with me that he also had a life insurance policy for many years. He didn’t know whether he even needed the policy anymore. He felt that with the money in his IRA — and the money in his work 401(k) – that, if he were to pass away, his wife would be okay. He was also concerned that the premium cost $218 a quarter. “It’s not a lot,” he said, “but I don’t feel I need it and might as well save the $218.”

As it turns out, there was a pretty substantial amount of cash value in the policy. After running some numbers of my own, I agreed with him that he probably didn’t need that life insurance policy anymore — for death benefit purposes, anyway. I asked them how they plan to pay for long-term care, if one or both should need it. As it turned out, if they needed to use their retirement assets to pay for long-term care, this was a race that needed to be addressed. It could significantly reduce their retirement assets.

A Plan for Long-Term Care

They did not have long-term insurance in place. The solution that we came up with was to skip buying individually-owned, long-term care insurance. However, we did decide we could transfer the cash value that was in his current life insurance policy into a new life insurance policy that had a long-term care rider.

Here’s how that worked:

His current life insurance policy has a death benefit of $250,000 at a cost of $218 a quarter. The policy had $92,400 of cash value.

He had paid around $71,000 into the policy, making his cost basis $71,000. If he were to cancel the policy and have a check sent to him for the cash value, he would have to pay tax on the difference between the cost basis and the cash value (an approximate $21,400 difference).

I recommended, instead, that we do a 1035 exchange. This allowed us to do a tax-free transfer from his current policy to another. With the new policy, he could have a death benefit of $320,000 –which is $70,000 more than his other policy. The new policy would also come with a long-term care rider. This rider would allow him to access money from the death benefit to cover long-term care during his lifetime.

Additionally, we structured the new plan so he would not need to make any further premium payments. If he should never need the long-term care, the $320,000 will pass on to his wife or his children and be completely income tax free.

When planning with new clients, and we get to the part where we begin to take inventory of any life insurance policies, people are shocked! They learn that they can perhaps either save money on their current policy or increase the amount of the death benefit for the same cost. Often, they are very surprised that this would even be a possibility — especially if they bought the original policy many years ago.

Life Insurance Policies Change Over Time

Two things are important to take away from this:

1. Because people are living longer, mortality rates on life insurance policies have declined over time.
2. Sometimes, a life insurance policy that was bought 20 years ago or longer was bought for a different purpose. When you compare the policy to the new policies available today, sometimes it makes sense to make a change. Bill’s policy is just one example.

I recommend that you obtain an in-force illustration for your policy at least every couple of years to make sure that the policy is performing as you anticipated and to make sure the policy is in line with your current goals and objectives.

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