How to Spend All Your Money in Retirement and Still Leave a Legacy Life insurance is key to leaving financial legacy while spending your investment money.

If you have a desire to leave money for your spouse or kids, life insurance is the best asset to leave them.

Notice I said “asset,” not “investment.” While the cash value of permanent life policies can be a valuable source of money, I focus on the value of the death benefit.

In a well-designed retirement income and legacy plan, your target life insurance death benefit should be equal to what you want to leave your heirs.

Life insurance cash value is not a particularly attractive investment, nor should it be compared to other investments. However, if structured to be in force at death, the life insurance death benefit is a terrific legacy asset. Unlike other forms of insurance, we are guaranteed to have a death claim. We know how much it is worth (death benefit), we just don’t know when this asset will be “realized” (at death).

What makes life insurance (the asset) a potentially great vehicle for retirees?

It frees retirees up to spend all their money while they are alive and still leave the financial legacy they want to their heirs. This is HUGE!
The leverage: the total payments/premiums made are a fraction of the death benefit paid.
While the net return (death benefit minus total premiums) is reduced over time as the insured contributes more premium, the overall return is usually a good value.
The entire death benefit is received income tax-free and payable in full no matter when the insured dies while the policy in-force.

Have you ever thought about leaving money at death to your spouse or children?

Time to Make a Plan:

Most retirees I come across do not own a substantial amount of life insurance, but they do want to pass a portion of their life savings to their spouse and/or children.

Their default option is to not spend their retirement savings because if they spend their principal, there will be that much less for their survivors. What if they owned life insurance in the amount they wanted to pass on?

For example, if a retired single woman had $500,000 in assets and $500,000 in life insurance with a desire to pass her retirement nest egg on to her children:

Instead of living off the interest from the $500,000, she could draw down the principal over her lifetime (an annuity stream of payments could guarantee the stream for her lifetime) and she could leave her heirs the tax-free death benefit from the insurance.

She would have much more money to live on and her children would inherit her entire nest egg ($500k insurance). Win/Win

REAL LIFE STORY:

My mother was in this boat. After my father died in 1998, my mother wouldn’t spend the money in the 401k/IRA that she and my father built together. She wanted to pass it to my sister and me. My mother was stubborn and wouldn’t take money out of her IRA to supplement her income and lifestyle.

Meanwhile, we (her children) wanted her to have more spending money today and for the rest of her life. We told her “mom, spend your money”.

It was time to put on my Certified Financial Planner hat and come up for a solution on how she could spend her IRA money and still leave my sister and I the financial legacy from the IRA.

As her advisor, my recommendation was for her to buy a life insurance contract in the same amount as her IRA balance. That way she could spend the IRA balance and still leave the life insurance as a tax-free asset for her kids. The life insurance premium was roughly 2% of the IRA balance. So we withdrew the premium from the IRA each year to pay the premium.

After this was in place, she started drawing down $1,000/month of the IRA balance to help her lifestyle. Now, she knows she will pass the life insurance asset tax-free to her kids and freely spends her IRA money.

Fast forward 15 years and she has drawn from the IRA for other needs and actually seen the IRA balance grow significantly despite the withdrawals. This worked out because the investment returns were greater than what she withdrew.

It’s a win/win strategy.