'Life' Strategies

Income Planning with Death Benefits

How to complement the value of annuities and assets under management

by Herbert K. Daroff, J.D., CFP, AEP

Mr. Daroff is affiliated with Baystate Financial Planning, Boston, Ma. Connect with him by e-mail:

Where do death benefits fit?

First, consider insuring others. How old will your parents or grandparents be when you retire? They may not pass away before you retire, but will certainly do so during your retirement. So, isn›t insuring them very expensive? No!

All insurance «costs» the same.  Cost is the present value of death benefits received reduced by the present value of premiums paid.  The internal rate of return at actuarial life expectancy is approximately the same regardless of age or insurance rating.

Second, consider using death benefit on your life to fund the income taxes on a Roth Conversion of your retirement accounts.  Surviving spouses can convert to a Roth.  You can convert to a Roth during your lifetime, even upon your death bed.  However, other heirs cannot convert an inherited retirement account.

Third, recognize that life insurance on your life gives you permission to spend principal.   Death benefit provides income and/or principal for your surviving spouse and/or other heirs.

Fourth, if you have a pension plan benefit with an option of higher single life payout versus a lower joint and survivor benefit for spouses, consider the single life benefit plus life insurance to maximize retirement income.

Cost is the present value of death benefits received reduced by the present value of premiums paid.

So, how much will you need?

How much do you need to fund $100,000 per year net after taxes, inflation, and fees starting at retirement and lasting the rest of your life and that of your spouse? Tough to answer without knowing the following for every year of retirement (along with knowing actual date of death for both spouses):

  • Investment returns
  • Tax rates
  • Inflation
  • Fees

Assuming $100,000/year income from 65 to 95 with 2% inflation, 30% tax rate, and 5% net after fee return, you would need $3.5M.

But, those are linear assumptions…

Most financial plans I see assume both spouses die at 90 or 95 and the age difference between spouses is about 2 years.  My mother outlived my father by 30 years.  There seems to be more widows than widowers.  Life insurance helps hedge that risk.◊