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There are many reasons why families entering retirement should re-evaluate their life insurance needs.

First and foremost, retirees are generally living longer, especially women, so it is important that retirement plans consider the fact that one or both spouses may live into their 90s.

Inflation has not been a major retirement-planning factor for some time — until recently. This year, inflation has risen substantially, and it is likely that it will continue rising. Higher inflation rates mean that retirees either need to earn more on their investments or cut back on their standard of living.

Even though, on average, life spans have been increasing, every retirement plan has to take into consideration the possibility that one of the spouses may have an early, untimely death. The death of the previous breadwinner can have a significant impact on the income of the surviving spouse.

Social Security not enough

One reason is the impact on Social Security income. Many people believe that because of Social Security survivor benefits, a surviving spouse would not lose any income; this is not true.

While a surviving spouse is eligible for Social Security survivor options, the surviving spouse would only be eligible for the maximum benefit after reaching full retirement age (likely 67). The benefit is available at 60, but at that point it is discounted a great deal.

In addition, the surviving spouse would not be eligible for both a survivor benefit and the benefit he or she is receiving, either based on work record or a spousal benefit. He or she would only be entitled to whichever amount is greater, not both.

Another issue is pension income from the main breadwinner. The deceased spouse hopefully elected a survivor pension benefit, but that benefit is likely to be less than the pension the deceased spouse was receiving.

For these reasons, a surviving spouse may be looking at a much smaller income in retirement after a partner has died earlier than expected. Life insurance proceeds can help a great deal.

Barry Flagg, CFP, CLU, founder of Veralytic, an independent life insurance research company based in Tampa, Fla., was a recent guest contributor to Ed Slott’s monthly IRA Advisor newsletter (irahelp.com) to discuss why life insurance has become more meaningful for beneficiaries.

He pointed out that life insurance is the only asset that matures at the same time that a need for cash arises.

Flagg suggested that dual-income families seriously consider insuring both family members in order to secure the lifestyle the family is used to in the event of an untimely death. He pointed out that retirees can purchase life insurance online and in some cases without a medical exam.

Several tax benefits

He cited a joint 2021 “barometer study” conducted by LIMRA (a financial services trade group) and Life Happens (an insurance trade group) that indicates that 47% of Americans say they put off purchasing life insurance they need, despite the fact that certain policies have tax preferences that are unique to life insurance.

For example, life insurance proceeds are exempt from federal taxes. Flagg discussed the possibility that there may be changes to the estate tax laws that would have a negative effect on some beneficiaries. However, the use of an irrevocable life insurance trust would avoid estate tax.

According to Flagg, a spousal lifetime access trust (SLAT) could provide married couples with access to policy account values for retirement while still exempting death benefits from estate tax.

Flagg indicated that families could use low-cost investment products with the “best available rates and terms” and potentially double the death benefit with the same premium, or add benefits such as long-term care. When no longer needed, excess account values can be allocated to other investments while maintaining the same death benefit.

There are many tools available to ensure a prosperous retirement. Life insurance is one of the tools that is underappreciated by many retirees, especially those who retire young. It is much more cost effective to buy life insurance either prior to retiring or in the early phases of retirement.

At 65, I purchased a 20-year term policy to protect my beneficiaries, including my spouse, at very reasonable rates that would have been much too expensive later.

© Elliot Raphaelson. Distributed by Tribune Content Agency, LLC.