By LEE MUNSON
CFA, CFPÂ®, Founder and CIO of Portfolio Wealth Advisors
Yes, I did just imply the major cons in life insurance is usually the salesperson selling you expensive, products you donâ€™t need. The pros never change: hedging an unlikely event that could ruin your financial plans. We all understand (donâ€™t we?) why young people starting off with a new family need it.
Covering a big mortgage, college expenses, and the lack of income from a deceased spouse. What happens when we get older and are ready for a life of adventure after LANS? First off, Iâ€™m not getting into what you should tell your adult kids about life insurance. Iâ€™m talking about what you should be doing or not doing in your late 50s and early 60s.
Before I start in, just remember to check prices of life insurance between the LANS offering (a group policy) and the open market (an individual policy). Lucky for you, term quotes are available on the internet and no insurance people will want to sell you term insurance.
Why? There is very little commission in term insurance. This is also why nobody in the industry will steer you in that direction.
While I have an insurance license, I could care less if people write a term with me or not. If itâ€™s a small policy I usually just want my client to do it online to save everyone time. For larger policies clientâ€™s may want my help, and my main goal at that point is to keep the expensive whole life sales-wolves at bay.
In the last few years I over-hall my clientâ€™s life insurance needs for the final push into living off your assets. Most of the time, this includes any gap of last-minute savings, pension strategies and mortgage solutions. Letâ€™s break them down.
In general, the payout for the typical LANS pension is pretty sweet. Those last few years can see a big hike in benefit amounts. If you die before collecting your lifetime benefit at retirement at LANS, only what you paid into the system and a token $7500 death benefit is available for your spouse or family.
That amount wonâ€™t necessarily produce a long-term stream of income because now you have to manage the money instead of a promise by the pension fund to pay it over your lifetime. So, you need to calculate the capital you would need to have to make a similar pension benefit if you donâ€™t make it to retirement. If that figure is less than the lump sum, life insurance can plug the hole.
The trick with the calculation is picking a reasonable rate of return for the annuity money, lifespan of the client, and weighing the adjusting for the cost of living adjustment the pension would get. You know, itâ€™s similar to figuring out how to land a rocket on the moon while traveling from a moving body that orbits another moving body and so on.
While I still look at certain pension strategies, for a legitimate wealth manager itâ€™s more like digging in the trash for uncollected lotto tickets. You may find one, but more often you just look grubby in front of clients. Here is what I tell people and hope they donâ€™t find it to horrible.
I figure out the difference between the straight life payout and the joint payouts.
This just means a stream of income on your life or you and your spouse. Take the difference, then try to find a whole life policy that can make up the joint payout. Of course, you have to pay for the policy with the extra money for taking a single life payout over the lower joint payout.
Okay, why are we doing this at all? In theory, if it worked you would have the same cash flow, and the insurance agent makes a big commission. Over time the concept is that the policy grows in value. This has only worked a few times in my 20 years of doing this. Donâ€™t fault me for looking, but donâ€™t believe anyone who says they do this all the time and it works all the time. They are lying. The last one is an easy one. Under saved, over spending on a retirement home is a real issue in my profession.Simply put, many people canâ€™t afford the luxury of holding no mortgage. They have to invest cash at a higher long-term rate than their 30-year mortgage rate.
If that is the case, there may be a short-term case for a small term life policy to pay down the debt if the surviving spouse wonâ€™t be able to make the payment if they lost a pension from their spouse.
This comes up more when dealing with people who have a military pension that goes away at death. It also comes up when you have a kid living long term at home, or a couple that isnâ€™t married or named as the other beneficiary for a joint payout. Hey, what if you were single and just met someone after retirement?
These are real things that come up. Most of the time life insurance can be reduced or eliminated at retirement. But for some, there is a legitimate use for life insurance. Just make sure you donâ€™t ask the barber if you need a haircut.