How you can help clients replace lost income with Life Insurance
by David G. Freitag, CLU, ChFC, CRPCMr. Freitag is Vice President, Impact Technologies Group, Inc., with offices in Boston and Charlotte, NC. He can be reached at dave.Freitag@impact-tech.com
For clients who are paying into the Social Security system, finding the correct benefit filing strategy can be a daunting challenge. A married couple has over 560 different age- based filing options to consider. Picking the wrong option could cost them thousands of dollars in lost benefits. Conversely, careful selection of the best filing strategy for Social Security benefits can help them receive additional benefit income.
Assume that a 62-year-old married client has a $2,400 benefit at full retirement age. Further, assume that the client files and suspends the Social Security benefits at age 66 and the spouse claims “spousal benefits” at 66. This filing strategy allows the client to take advantage of delayed retirement credits and at the same time creates immediate income for the spouse. It is possible that over $15,000 per year will be paid to the qualifying spouse between ages 66 and 70. If the right age-based strategy is not used, this money could have been left on the table.
What might this “extra” income mean to the informed couple who takes advantage of this or other variations of age-based filing strategies when they file for benefits? Clearly, they could use the extra cash to support their chosen life style now. They could use it for gifting or it could be redirected into a savings vehicle like an annuity or mutual fund. On the other hand, with a little creative planning, they could leverage this “extra income” to buy new life insurance.
Life insurance has always been the product of choice to replace lost income. As retirees look forward to a retirement that might last over 30 years, income replacement becomes a clear need. Unlike a joint/survivor annuity or a joint/survivor pension, Social Security benefits are only paid if you live. The client and spouse have to live to win. When one spouse dies, part of the couple’s combined Social Security income benefit is lost forever. This lost income can dramatically change the life style of the surviving spouse.
Lost Income Due to Early Death
Life insurance proceeds create new capital. This new capital can create new income. This new income can offset the loss of benefits from Social Security. One of the biggest unknowns in a retirement plan is the looming and uncertain cost of long-term care. Again, adding new life insurance with a LTC rider to the retirement plan can also provide a substantial long-term care benefit. The client or spouse collects these benefits while they are alive and need new capital to pay expenses associated with health care needs.
If the couple does not need long-term care coverage or additional income, life insurance policy death benefits can provide for estate liquidity, legacy giving or wealth transfers. All of these great advantages are possible because the couple initially selected the correct age-based filing strategy when they took their Social Security benefits. Simply put, when correctly structured, the government pays the premium for the life insurance policy and the client and spouse are the beneficiaries of leveraged, tax-favored dollars. In addition, these dollars are delivered exactly when they are needed the most.
Everyone entering retirement should not only have an investment portfolio, but also a life insurance portfolio. For those clients who qualify, by initially selecting the correct filing strategy for their Social Security benefits, it is possible to include life insurance in the plan.