Reason to Buy Life Insurance {To “Replace” a Social Security Check} - Cravitz Financial & Insurance Solutions

Reason to Buy Life Insurance {To “Replace” a Social Security Check}

Life insurance could come in handy to "replace" a Social Security check. If you are married and your spouse passes away you will lose a Social Security check. Life insurance can provide an income tax free source of money to help you meet your expenses in retirement if this were to happen. In this video I will walk through a sample case and the pros and cons of buying life insurance. We'll also look at what the costs might be for this couple in this case study. 

Full Transcript:

Hey, what's going on everybody? It's Ryan here. So we're going to talk a little bit about life insurance and how life insurance can come in handy in order to replace a social security check. It's interesting because a lot of times, when I talk to people, most people think about life insurance as being good for typically younger families, maybe a young family, raising kids, that sort of thing. In case maybe, the primary breadwinner was going to pass away or did pass away that there would be money for the family in order for them to pay their bills and such. The fact of the matter is that there's numerous reasons why people may need to buy life insurance. So again, we're going to talk about how life insurance could come in handy in order to replace a social security check.

So here's what I'm going to do. I'm going to share my screen here with you. I'm going to walk you through the sample case. I'm going to make this as simple as I possibly can without getting into the weeds of it all. But I do want to show you the things that I think are really important. So with that, let's get going here. I'm going to share my screen, and here's our sample couple. So we have John and Jane. John, and Jane sample, you can see that right here. Just the purely hypothetical couple. They're both 66 years old, and their expenses right now are $3,800. You'll notice this as preretirement expenses, and that is because Jane has already retired, but John is still working. He's going to work for one more year and then retire when he's 67. So they'll both be 67 when they retire.

And I made this really easy. I'm assuming that they're not saving any money, such as in a 401k plan or anything else. So I'm not even going to press that tab. We're going to look at the income tab right here. And again, I've got Jane's salary in here as zero because she's not earning an income this year. And John had just plugged in a 100,000. It doesn't really matter for the purpose of what we're looking at, but that's what I've got there. And then what really does matter is the social security, because in order to make this really simple, what I assumed is that their entire net worth is absolutely zero. Now I know that's not a real-world type of scenario. In fact, let me just jump to that over here on the net worth section.

What you'll see here is that they don't even have a penny in their checking account. So it's absolute zero, nothing in their bank accounts, nothing in their investment accounts, all this is just completely blank, nothing, no balance. So come back to their income and what I plugged in here is, I just plugged in to assume that John's full retirement or that he's going to take social security as full retirement age and that his PIA is $2,800. That's that big number that you see on page one of your social security statement. So I'm just assuming again, I'm PIA for him with 2,800, and for Jane, I'm assuming 700. So presumably, Jane didn't work as much outside of the household over the years and presumably maybe didn't make as much income, that sort of thing.

So these are my assumptions. Again, they're both going to retire next year. They're both going to start taking social security next year at the age of 67. As an aside, keep in mind, you can take social security anytime between the ages of 62 and 70. The longer you wait until you take your benefit, typically the higher your monthly benefit is going to be by earning delayed retirement credits.

So in their scenario, because they have no net worth, they have no other savings or investments or anything like that. So if they want to retire, their only source of income is social security. So it doesn't make sense for them to perhaps delay taking social security and earning most delayed retirement credits or anything like that. Again, this is just a very simple example. Bottom line is they 66 now. John's going to work for one more year, then retire, and then they're going to kick in their social security, and their goals in retirement are the same as they are now, as far as how much they need to live on. So they need exactly $3,800 a month after taxes in order to meet their retirement living expenses. And what you're going to see when we get to the cash flow section is that this number increases every year to account for inflation.

So I'm factoring in an estimate of 2-1/2% for cost of living adjustments. And I have to put something into my software for health care costs. The reality is, is that healthcare is going to cost much more than $1 per year per person certainly over time. But for the software, I couldn't put zero. I have to plug in some number in. Plugging in one will hardly make any difference here whatsoever, so I've just plugged in one here. So basically no healthcare costs, no long-term care costs. I know you'll see that number of $51,000 each, but no long-term care is being assumed to be needed throughout their lifetime.

All right. So, let's go over to the retirement tab, and what we're going to see here, we're going to get to the cash flow section. What you're going to see here is that they're going to have plenty of money for retirement, as long as they're both alive earning or receiving their social security income because the money that they're going to get from their social security is going to be more than enough to meet their monthly living expenses. The issue which we'll get into is if one of them were to pass away early. So when they retired, so again, this year... I'm recording this video in 2020.

So remember John's working for one more year. He makes $100,000. And as a side note, notice this the tax payment, estimated taxes in that first year are $19,228. Don't want to get into the tax part, but that includes the FICA taxes, payroll taxes, federal and state taxes. I'm presuming they live in California in this scenario. And so what you'll notice after that, though, every single year is that they don't have to pay any income taxes whatsoever. And that's because, and their example, or in this example, all of their income is coming from social security. And if all of your income is coming from social security, you don't have to pay any income taxes, as you'll see that right here with these folks.

So bottom line, and I'm going to go to the year 2022, not 2021 because this will show all 12 months of income coming in for their social security. I should have made some adjustments on the input side in order to make it so that we could see everything in 2021. But just to keep it simple, let's just look at 2022. You'll see they're projected to have a total of $55,775 coming from social security. Broken up, you'll see in 2022 that's John's retirement benefit, Jane's retirement benefit, and the spousal benefit. Again for the total of 55,774 and or 775, rounds it up here, and their expenses are $47,911. Again, we're inflating that we're keeping up with the cost of living, still their unsaved cashflow is just 7,864. So, in other words, what that means is here's their income, here's their expenses, and if we subtract their expenses from their income flows from their social security, they actually have more money each month than they actually need.

So they have enough to meet the $3,800 a month in today's dollars for expenses, and then they have this extra money over here. So the bottom line is this. If they both live a long life, like I was saying before, let's say they both live until they're 95 years old, they're going to have plenty of money to meet their living expenses, again, this is a simple example. I'm not assuming any high health care costs that could perhaps come up or anything else like that. The issue that we want to discuss is, what happens again if one of them were to pass away early. So let's take a look at that.

So we're going to pull up the life insurance tab here, and what we're going to look at is if one of them were to pass away next year. So I'm going to go to the life insurance tab, and we're going to be able to take a look at what that looks like. Notice what the cashflows were like here when both of them were alive. Now we're going to start looking at what the cashflows would look like if one of them were to pass away. And I'm going to go and pick on John. Let's say that John is the one that passes away next year. And so if that happens, in order for Jane to meet her monthly living expenses of $3,800 per month for the rest of her life, she would be $228,615 short. We could see that right here in red. This is the shortage in red, how much she's short every single year.

Now, you'll notice most of this is still coming from social security. Now, her social security dropped off considerably. It was about 50 something thousand remember. Now it's about 34,000 as it starts out here at the age of 67 and at 68, it goes up to 35,000. So around 20,000 difference. When we go over here to the cashflows, the reality is, Jane may say, you know what? I don't need all that income. If John passes away, we could sell a car, or I could sell a car. John won't be here, but I could sell a car and, this sounds terrible to say, but there's one less mouth to feed. So presumably, there's less expenses if one person were to pass away. Now, there still might be the same mortgage payment and other fixed costs and things.

So each person's situation is going to vary, but let's say she said, no, no, I need to have that $3,800 per month for the rest of my life. I need to make sure that happens, and I've got an income gap. So how do we fill that? That's where the life insurance can come into play. So again, this is how much she's short, $228,615 if John were to pass away next year. But the reality is is that you don't need $228,000 of life insurance because she only needs to take out a little bit each year to supplement her social security. So she could invest the rest and presumably earn a decent rate of return on that and so she wouldn't have to buy as much life insurance.

So as an example, Let's say we looked at $150,000 life insurance on each of them. And if we did that, what we want to take a look at is how long this $150,000 would last. The program's coming slowly. I don't know if you could see that there it's loading.

And if we go right here to the invested assets, so we can see, if John passes away next year, she goes ahead and takes the money that she needs on a monthly basis to supplement her living expenses. That money would still last until age 90. At 91, she would be completely out of money, and that might be exactly what she would need, or she might say I don't really need that full $3,800 per month all the way up until I'm 90. Even if I could have that until I'm, I don't know, 80 something, that would be okay. And here's the thing you'll notice this is certainly something that would be on a case by case basis. But what I've seen a lot of times is that very few people retire exactly at 65 anymore, but let's just say that you did.

The age of 65 to 80 I typically find are those years where you're out there, you're active, you're doing all the things that you want to be doing. You have all this free time now, now that you're retired, and you're as healthy as you probably will ever be. And then typically, in your eighties, you start to slow down some, and then in your nineties, you start to slow down some again. So usually most people want to spend more money earlier on in retirement because of that. And so if that's you, and if that's Jane, for instance, she might say, I really don't need this until I'm 90. What if we just got $100,000 of life insurance? Well, if we did that, let's see how long this would last.

Well, now it's going to last until she's... There's still money at age 82, and a runs out at 83. So that gets her from all throughout her seventies and then up until 83. And she might say, hey, that's fine, that's all I need. So the next step is to say, well, how much does a life insurance policy cost for $100,000? And what I'm going to do here is I'm going to pull up a life insurance quoter, and this is a pretty simple, quick, and easy, excuse me, calculator for me to use on this video. It's not going to have every insurance carrier on here, but it'll give us a good general idea is to, how much the life insurance would cost.

So let's look at John. So John's a male. I plugged in a date of birth at 12/01/1954, based on today's date that makes him 66. And so let's say he needs $100,000 of coverage. And let's say we're looking at a plan that will cover him for 10 years. That means that the premium will stay exactly the same for 10 years. The amount that he has to pay. Technically he can keep the policy beyond the 10 years, but the premium is going to jump up considerably, and he'll probably end up dropping it, so that's just how these types of plans work. Then the rate is going to depend upon the rate class that he would be approved for. So I'm not going to get into all the different rate classes now. I'll just quickly say that the preferred rate classes are the above-average rate classes, and if you get those, you're getting the better rates that the insurance company offers.

Go down to the standard rate classes. Those are some of the mediocre type of rates that you can get for people that are more average health and then your table rated. So this is typically if you have more significant health type of issues and the higher your table rating, meaning a table rate it's going to cost more than, for instance, a table four. So the farther you are down, the more it costs. So let's just say John's in pretty good health. He's not in the best of health, but he's pretty good. So if he's in preferred health, as an example, and we're looking at $100,000 covering him for 10 years. We're only talking about like $62 a month or about $712 on an annual basis.

So pretty inexpensive, if he's an average health, a standard type rating, we're still only at about $98, which is about $1,100 or so on an annual basis. And then if he wants to, let's go back to preferred, maybe get a 15-year plan instead of a 10, maybe they figured 10 isn't enough, 15 is going to cost more. The longer your turn, the more it costs. So let's say we're looking at a 15 year, and now we're only looking at about $972 on an annual basis. If he's comes in at standard health. We're looking at about 1500 bucks. So just depending on what kind of plan that we're looking at.

Now for Jane, that's going to be cheaper. All things considered equal, meaning same date of birth and same everything else. If the only difference is this right here, the gender, you'll see that this costs less. So let's say for her, instead of, let's say for John if he had $100,000 for 15 years and coming in at standard, an average type of rate, or will cost him about $1,500 with the lowest cost company we can see here. For Jane, it could cost about 1,000 bucks in comparison. So let's just say they're both an average health, approximately. We're looking at about $2,500 on an annual basis and if you remember going back to the other screens, so let me go back over there.

So you can see right here in the cashflow. So they have an extra around $7,800, $8,000, $9,000 that they have available to them on an annual basis. So again, one thing that they could do, depending on the type of life insurance plan, depending on what they qualify for, it could cost them a 1,000 bucks, $2,000, $3,000 whatever on an annual basis, they would still have extra money coming in that they don't need to meet their living expenses while they're both alive and it would protect the other to make sure they could still have the same type of lifestyle that they want to be able to have and be able to meet their living expenses that they want to be able to meet. So hope all this made sense. If you have questions on anything here whatsoever, feel free to reach out to me, and I'll see you in the next one. Take care.


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