Life Insurance and Income Protection
In reviewing many retirement plans, I find that many times too little thought is given to life insurance as a retirement benefit. Too often, pre retirees do not even engage in life insurance planning at all. Why bother? Life insurance is about dying and not about living, they think. On the other hand, most people want to take care of their spouse after they die, but without the proper insurance coverage the spouse could be left with far less avail-able income.
Many severance and early-out packages continue the insurance policy that the company carried while the worker was employed. The policy face amount is usually pegged at the employee’s salary times a multiple, which then is reduced at some future date. For example, two times a salary of $60,000 would give you $120,000 in life insurance coverage, but often-times this face amount is reduced by 10 percent per year for every year you pass age sixty-five. In this case, the retiree’s insurance will have disappeared by seventy-five. But the need for coverage has not gone away. For some of us, the need for life insurance coverage is even greater as we age. Think of it. As we get older, more things can go wrong, forcing us to spend our savings. A catastrophic illness of one family member is one way we can wind up spending all of our retirement assets, and life insurance can replace those assets.
Trying to explain to retirees that they need to start thinking seriously about adding life insurance—and along with it, another fixed expense, the premium—is not easy.
Although we think of our retirement income as being enough for the both of us, we can forget what happens if we die before our spouse. For example, suppose both spouses are receiving Social Security income. If one spouse never had “earned income,” would your combined Social Security income remain the same once the one spouse dies? No. For example, the Social Security benefit that you each may have qualified for when you reached sixty-two could be lessened upon death of the higher wage earner. My mother began receiving my dad’s Social Security check after he suffered a stroke, because she became his guardian. For the time being, she also continues to receive her own check. When he passes away, she will receive one check that will be less than the total of the two she now gets. Unhappily, his life insurance will not be enough to replace her lost income. That can happen to you, if you do not have a plan to replace income.
