We thank Herman Davis, Regional Vice President for Liberty Bank, for sharing content from The Liberty Line, a publication of Liberty Bank.
Every stage of life has its own unique financial planning and insurance needs and retirement is no different. If your life insurance policy hasn’t changed in twenty years, the coverage it provides may no longer be well suited to your stage in life. That doesn’t mean you should drop all life insurance but you may want to revise it.
|Transferring a Policy? Don’t Wait Too Long
If you intend to transfer your life insurance policy for the purpose of reducing your estate tax, you might not want to wait too long.
Here’s why: Life insurance transfers made within three years of your death are disallowed for federal estate tax purposes. In other words, the proceeds of the policy will still be included in your estate.
To effectively eliminate the proceeds from your estate, you must give up all rights of ownership. So give the decision careful thought. Suppose you transfer the policy to your spouse and later get divorced. You won’t be able to take back ownership. Transferring a policy means you no longer have the right to:
Keep in mind that even in retirement life insurance can be an important component of a sound financial plan.
Here are five reasons why you might still need life insurance:
- Funeral expenses – According to the National Funeral Directors Association, the average funeral (including the vault and casket but not cemetery costs, tombstone or miscellaneous costs such as flowers and obituaries) is $7,755. This amount can easily go much higher and pose a heavy financial burden on your survivors. Paying for the costs associated with death is a crucial role of life insurance.
- Health care expenses – If you incur large medical bills before you die, life insurance can help pay these bills so they don’t get passed on to your loved ones.
- Estate taxes – Depending on the size of your estate, your heirs could be responsible for paying federal and state estate taxes. Life insurance can be used to cover this tax burden. And if your estate is made up primarily of a business or real estate, insurance can prevent your family from being forced to sell the assets to pay the tax bill
- Caring for dependents – Life insurance can help a surviving spouse continue to enjoy a comparable lifestyle especially if he or she will not receive your full retirement income, pension or Social Security benefits.
- Charity – Some people choose to give life insurance policies to not-for-profit organizations so they can help their favorite charities and collect tax breaks. Generally, the tax deduction for a life insurance policy gift is equal to the premiums you paid minus any dividends you received.
If you are interested in this type of gift, however, make sure the charity is a qualified organization that will accept a policy. Some organizations are not equipped to go through the necessary processing to handle these types of donations and others can do so only if an insurance policy is structured in a specific way. You can deduct claim deductions if you name the charity as the irrevocable beneficiary. Charitable gifts of life insurance can pose problems if they aren’t structured properly so seek advice.