Don't Lose Your Life Insurance at Retirement

On   Jan 26, 2018

Replacing university-provided benefits and income becomes a primary objective for many professors when they reach retirement.

Most professors have three major assets:

  • Their retirement account, which could be $1 million or greater
  • Their home
  • Their group life insurance program

Many have other assets like a second house, cottage, side business or a farm. But 99.9 percent of university folks have the “big three” assets. Unfortunately, most of them ignore the group life insurance. They think about health insurance, disability insurance, Medicare or even Social Security when they're approaching retirement. But rarely do they think about life insurance. They're always thinking about financial planning for their spouses and their families.

One big mistake is to allow your group life insurance provided by the university to lapse. What happens to many professors is they have $1 million of group life insurance on retirement day, and then zero the next day. Even before state and federal income taxes, it’s a loss of $1 million of total assets that were perhaps already committed to the spouse and-or children. Be aware -- that's going to happen. You can take precautions -- either within the benefit program so the life insurance can be extended, or take out your own policy if you want to retain that $1 million of life insurance.

Most people in the university environment do not have personal life insurance policies. Most of the people we've worked with over the years did not have anything beyond the group life insurance benefit that was offered through the university. Group life insurance was the last thing on their mind, until they found out it had ended.

One benefit of life insurance is that the insurance death benefit is generally income-tax free -- the opposite of a retirement account. Let's say a professor has a $2 million retirement account that has taken 40 years to accumulate, along with a $1 million life insurance policy that took her about a half hour to accumulate. (All she had to do is sign up and pay the first quarterly premium, and she had $1 million of life insurance.)

Even though the retirement account equals $2 million, it won’t pay out that much. In order to get $1 out, she has to pay $1.20 or $1.30 or even $1.40. That amount over $1 goes to Uncle Sam in the form of deferred income tax. Even after she dies, there will be taxes on that account for whoever withdraws the funds.

The same is not true of $1 million of life insurance. If the insured person dies, his spouse or his children or his grandchildren will get $1 million of life insurance to the penny. Life insurance is a very tax-efficient way to pass on dollars.

Get a Second Opinion on Your Finances

Enter your preferred meeting time.