Reducing Life Insurance Premiums in Preparation for Retirement

This is Part 2 to a previous Client Story entitled "Why have life insurance after retirement?".

Ed started the conversation anew. "I do, somewhat vaguely, remember our previous conversation about life insurance after retirement. However, I don't remember that I was going to have to pay these life insurance premiums after retirement. It's hard for me to see how I can pay these premiums, and still have a reasonable retirement income."

"Ed, I know you're interested in learning ways to reduce or eliminate the life insurance premiums after retirement. There are several ways you can accomplish this, but let's talk about the most practical strategies that are available.

Use Whole Life Dividends

First, if your whole life insurance dividends are substantial enough, you could use these to begin reducing or paying the entire annual premium of the policy, so that your net out-of-pocket cost is reduced. If you have permanent universal life insurance policies, and the life insurance cash value is substantial enough, the excess interest may be able to pay your cost of insurance, so that you  may also eliminate the annual premiums, or at least reduce them substantially. We found in our experience that if your life insurance cash value is approximately 30%, or even as high as 35% of the Death Benefit, there may be enough dividends or excess interest from the policies to pay the premiums."

Ed asked, "So, what are dividends and excess interest?"

"Universal life insurance policies normally guarantee a minimum cash value of the policies, or some form of minimum interest payment. Depending on how old the policies may be, the minimum interest on some policies may be 3%, some times as high as 4% or 4.5%. Any interest that is credited to this policy over and above this guarantee is considered "excess" interest.

On whole life insurance policies, the profitability of the Mutual insurance companies, which include low mortality claims, may be paid to policyholders as dividends, as long as your policy is with a Mutual insurance company, an insurance company owned by policyholders.

Ed, if your policy was structured properly, the excess interest that pays your premiums, or the dividends that you use to pay the premiums, may be tax-free. By comparison, if you're receiving dividends from stocks or mutual funds, they are generally taxable."

Ed asked, "Are there any other strategies to reduce or eliminate life insurance policy premiums after retirement?"

Change to a Reduced Death Benefit

"Ed, there is the strategy of changing your policy to a reduced Death Benefit, on a guaranteed, paid-up basis. They normally call this the "Reduced, Paid-Up" option. If your excess interest from the life insurance policies or the dividends are not enough to pay a substantial part of the policy premiums, you could elect to reduce the life insurance Death Benefit, permanently, and change the policy to a "paid-up" status, thereby eliminating 100% of the premiums. If this option reduces your Death Benefit substantially, this may not be a strategy for you to implement.

Additional Strategies

Ed, these are the most common ways to eliminate or reduce life insurance policy premiums after retirement. There are also several other strategies available which are going to depend largely on other assets that you own in your portfolio, such as stocks and mutual funds. In other words, earnings from these types of accounts or investments may also be used to pay life insurance policy premiums, assuming you're not living on these earnings when you retire."

"Frank, this is exactly what i needed to hear. I'm now assured that the whole life insurance policies that I have really do have a place in my financial plan after I retire and I'm glad to hear that there are several strategies to reduce or eliminate the policy premiums. It makes me feel like I've just added several more pieces to my retirement puzzle. However, we really need to review what we just discussed at least every two years, so I don't forget the strategies. I'm realizing that the strategies we discussed for life insurance after retirement will allow an opportunity to provide a substantial increase in my retirement income. I don't want to lose these opportunities by focusing on the premiums, not the bigger picture."

"Ed, we'll do exactly that. Let's put this discussion on our future agendas."


*Guarantees are based on the claims-paying ability and financial strength of the issuing company. This hypothetical example is for illustrative purposes only.

Why have life insurance after retirement?

Ed and I were discussing his financial plan during a web meeting a few weeks ago. Ed is a very intelligent professional and asks significant questions about financial planning strategies so he can have a clear understanding of how they are applied. He's a great client because he doesn't take my word for anything!

We were discussing his whole life insurance policies that he had owned for several years. Since he's in his 50s, we were discussing his retirement projections. During the course of this discussion, the amount of premiums he pays for his whole life insurance was mentioned.

"Frank, at what point do I stop paying these whole life insurance policy premiums? It seems that all these years we've owned these whole life insurance policies, we have been able to use the cash value for funding our kids' college education, as well as a down payment on a new home or two. I'm glad that all the policy loans are repaid, but at what time can I stop paying the premiums? The premiums on these whole life policies are very significant! I want to retire before age 65!"

Term Insurance Becomes Too Expensive

"Ed, I'm glad you brought this up. This shows that you're paying attention to everything you own, as usual. Remember, if all you were interested in was life insurance all these years, and didn't want life insurance after retirement, we would have suggested that you purchase term life insurance. During previous conversations, we discussed the benefits of having life insurance after retirement, and the older you get, renewing your term insurance becomes more and more expensive. At some point, term insurance policy premiums become so expensive, that you won't be able to afford to  maintain the policy after retirement."

"Ed, in your case, having life insurance after retirement is very important for a few reasons, so let's review what they are:

Remember, you have three Defined-Benefit Pension Plans from previous corporations for whom you've worked. You have had new employment opportunities with different corporations, so you haven't worked long enough with one corporation to build a substantial Defined-Benefit Pension Plan, correct?"

Ed said "Correct! I've been concerned about this as none of these Defined-Benefit Pension Plans are going to amount to much, and if I want to leave any portion of these to my wife, I'll have to take a substantial discount on the monthly income."

"Ed, you're right. This is why we discussed the whole life insurance. Here's how you coordinate the two decisions:

Use a Whole Life Policy to Maximize a Defined-Benefit Pension

If you have life insurance after retirement, this gives you the opportunity to consider electing the single-life option on your Pension benefits, which is the greatest possible monthly benefit, rather than taking a reduced benefit to provide survivor benefits for Teresa. Do you remember this discussion?"

Ed said, "Yup. I do. If I take the single-life Pension benefit and I die too soon, Teresa will have the life insurance Death Benefit to fall back on. Therefore, while I'm retired, I'll have the highest possible Pension benefit from my Defined-Benefit Pension Plans, correct?"

"Ed, you're right. If you happen to live a good, long time, the ability to take that extra Pension benefit by not providing a Survivor Benefit for Teresa may be quite substantial over your lifetime!"

"Frank, I remember that. But what other reason is there to have life insurance after retirement, besides the opportunity to maximize my Pension benefit?"

"Ed, there's also the possibility that you (or Teresa) may be in a position where you'll need to pay for home health care of long-term care costs later in life, if your health changes drastically after your retirement. The permanent life insurance policy Death Benefit may be used to help offset these costs."

Whole Life Can Help with Long-Term Care

Ed said, "How it that going to happen? Term insurance is life insurance, and for long-term care or home health care costs, it seems like I should have a long-term care insurance policy."

"Ed, we did have more than one discussion about long-term care insurance. Each time we brought up the topic, and looked at proposals, you and Teresa both agreed that the premiums were too high, wherein you would have to consider decreasing retirement plan contributions in order to purchase the policies. This of course would mean you would have to work longer to accumulate enough to provide the income we had projected for your retirement income needs. For that reason, you chose not to purchase long-term care policies."

Ed said, "Okay, so how do we use the permanent life insurance policies to offset long-term care costs?"

"Ed, you're right, whole life insurance policies were not intended to replace long-term care policies. However, I was studying for an exam for the four-hour Continuing Education Long-Term Care Course required in our State, and read an interesting chapter that described all the strategies available to use life insurance policies to offset long-term care costs. Here they are:

  • Since you have whole life insurance policies, the cash value may be used to directly pay for long-term care or home health care costs, or other expenses as you see fit. If you don't withdraw too much of the dividends, or borrow too much of the cash value, your policies shouldn't be in danger of lapsing. With this strategy, of course, you have to be very careful.
  • Furthermore, all life insurance policies, including term life insurance policies, have an Accelerated Death Benefit, or a Chronic Illness Benefit, that can be claimed even while you're still alive. You may claim up to 50% of the life insurance policy Death Benefit, to pay for any expenses that you see fit, assuming you have a shortened life expectancy. You and I can get into the details of how this works later, but suffice to say, I believe you would agree that if you need long-term care, or home health care, you're probably facing a short life expectancy, right?" Ed said, Yes, I believe that going to be correct!"
  • "Also, any life insurance policy, whole life or term life insurance, can be "sold" in a business transaction called a "Settlement Option", wherein you actually "sell" your policy, for which you'll receive a cash settlement, now, while you're still alive. This settlement option may be used to pay for long-term care or home health care costs, or other expenses as you see fit. In other words, under the Settlement Option, life insurance policies may provide an opportunity to be "sold" for some amount over the current cash value, but less than the current Death Benefit. A new settlement company takes over paying the premiums, and maintains the life insurance policy after they pay you, and they collect the total life insurance proceeds upon your death. Does this make sense?" Ed said, "Yeah, Frank, I read about this somewhere. This makes a lot of sense."

"Ed, although this next idea is not in the book that we studied for the Long-Term Care Course, this is some information you and I had discussed during a meeting at the early stages of our relationship together. Remember that the permanent life insurance Death Benefit is paid upon death, but the beneficiary can do whatever they want with the proceeds, correct?"

Ed said, "Your right. I remember that discussion."

"So, let's just say that you are in need of long-term care, and between you and Teresa, you happen to pay $60,000 per year for three years for long-term care costs, before you pass away. Compare this to the amount of whole life insurance that you have. What do you see on the chart that we sent to you?"

Ed said, "Well, Frank, I have $750,000 of whole life insurance Death Benefit, so upon my death, Teresa would collect $750,000, correct?"

"Ed, you're right. So, isn't it true that if Teresa collected $750,000 upon your death, this may more than offset the expenses that you paid for long-term care costs while you're still alive? In other words, if you had to liquidate investments to pay for long-term care, doesn't this life insurance Death Benefit more than replace what you liquidated?"

Ed said, "Yeah, I can see that. That also makes sense to me."

A Reverse Mortgage Can Create a Lifetime of Income....

"Ed, early on in our relationship, we also discussed the possibility that if you own an expensive home during your retirement years, you always have the option to convert this to a reverse mortgage, correct?"

Ed said, "Yes, I remember that. In other words, what I do is assign my home to a lending institution, and they're going to guarantee an income for life to Teresa and I, correct?"

"Ed, that's true. Keep in mind that the whole life insurance benefit is used to either pay back the lending institution so that the house can remain in the family, or you may use the whole life insurance policy in a more creative fashion. Reverse mortgages are generally calculated based upon your life expectancy. If the lending institution is going to lend a lifetime income to you or Teresa, it's going to be a smaller income if they lend it to you based on both of your lives, and a larger income if they base it upon your life expectancy only, correct?"

....And a Whole Life Policy Can Maximize This Income

Ed said, "Oh, I get it. This is a similar calculation used in the Defined-Benefit Pension Plan. In other words, I'm using the whole life insurance policy to maximize my reverse mortgage income, and upon my death, the whole life insurance policy benefit may be used to pay the lending institution, so that Teresa can remain in the home, correct?"

"Ed, you got it! This is one strategy that you may want to implement!"

"Frank, everything we discussed so far makes a lot of sense."

"Ed, let's make sure we recap the strategies that may be available to you with whole life insurance policies:

  • Maximizing your lifetime Pension income
  • Accelerated Death Benefit available while you're still alive that may be used for large medical expenses during your final years of life
  • Potential Chronic Illness Benefit that you may collect while you're still alive, to help pay for other expenses you incur because of your illness
  • The potential to use cash value to pay for long-term care insurance, or home health care expenses, normally not covered by Medicare
  • The ability to "sell" your policy to a financial institution or investment company, so that you effectively receive cash for your policy while still alive, rather than your heirs receiving the benefit upon death. Of course, this cash you receive may be used as you see fit, for expenses or otherwise.
  • The whole life insurance Death Benefit may also be used to replace assets that you spent from your investment portfolio for extraneous medical expenses not covered by insurance or Medicare
  • The potential to use your whole life insurance policies to initiate the largest reverse mortgage income possible. The whole life insurance Death Benefit may be used to pay off the outstanding reverse mortgage loan, so that the living spouse can remain in the home.

"Frank, this all makes sense. You and I did discuss many of these options during the course of our relationship. It was great to have this recap. Thanks for the 'refresher'!"


*Guarantees are based on the claims-paying ability and financial strength of the issuing company. This hypothetical example is for illustrative purposes only. Past performance is not indicative of future results.

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