I Don’t Need Life Insurance, So I Will Drop Mine

Because a primary reason to have life insurance is to replace lost wages in the event of an early demise, when people retire, they are less inclined to keep life policies. Often, they simply drop and surrender for any cash value in the policies. They view the policy as an expense, not an asset. That could be a mistake.

Even though the need to replace lost wages can cease at retirement, many widows find their lifestyle is hampered when their retired spouse dies. The total Social Security payable to the household decreases when either spouse dies and there may be a reduction in a pension payout. Plus, the survivor’s tax brackets compress when they start filing as a single taxpayer creating more stress on the portfolio.  

Nonetheless, many retirees will not “need” life insurance but they still shouldn’t be in a rush to drop the policies. There is an adage that no beneficiary ever thought the insured had too much life insurance. Add to that the fact that dying is a “when” not an “if” event and there is a potential for great regret. None of us knows if the proverbial bus is around the next corner.

First, and foremost a thorough physical exam should be conducted before they make a decision about a policy. Heaven forbid, they have cancer or another condition that could substantially reduce their life expectancy and not know it.

Beyond that, there are many things that can be done with existing policies to make the expense less burdensome or otherwise make better use of the asset that an in-force, uncontestable policy represents.

I Need To Convert To A Roth Account Because RMDs Will Put Me In A Higher Tax Bracket

For some clients, all they know about required minimum distributions is they are forced to take them at age 70½ and pay taxes. While not liking to be forced to do something is understandable, few ever seem to do the math. With recharacterization of conversions no longer permitted, doing some math is even more important today.

The first year RMD is roughly 3.7 percent of the IRA. It rises only to about 5 percent by age 80.  Clients with smaller or conservatively positioned retirement accounts often don’t experience the jump in taxes they fear.   

The obsession with the onset of RMD is also a bit short-sighted. The more compelling reason to convert would be that the client was confident that their current tax bracket will be lower than any future tax bracket that will apply to these monies.