Benefits and Compensation

Retirees Benefit from Life Insurance as Protection Against Declining Income

Recent economic conditions may be compared to torrential rains. It seemed at some points like the downpour just kept coming, and that companies and individuals got more and more panicky as the water kept rising.

All of us have been affected in one way or another, but perhaps none more so than the retired population. Like the rest of us, they saw their 401(k) balances decline month after month. But unlike everyone else, they may not have had the ability or the opportunity to do much about it.

However, there is something you, as an employer, can do to help. While the phrase “retiree benefits” may bring to mind rich healthcare plans, there is a full range of retiree benefits that cost much less and can really add to the security of your employees’ retirements.

Tim Brown, vice president of MetLife’s Post-Retirement Benefits group, believes such benefits are important to retirees, and to companies looking to attract and retain talent.

“Certainly the economy has impacted everyone, and cost-conscious employers are looking at ways to control benefit costs. But we find that they still recognize the value that retiree benefits play in retaining talent as part of a robust benefits package,” Brown says.

Life insurance is a good example. “Generally, employers provide a certain basic level of life insurance while you’re an active employee. And many of them continue to provide some basic level into retirement.”

Protection Against Eroding Funds

Brown argues that life insurance is a way to offset eroding retirement plan values. “It’s no secret that Americans are struggling with having enough retirement income these days,” he says.

“Final expenses can erode the assets they have. From that standpoint, life insurance can protect retirement income.” Funeral costs average $10,000 or more, says Brown. “That may be low in some parts of the country. The first step to take is determining the cost of final expenses for retirees, so you can decide how much life insurance you want to provide.

“Life insurance is the one retiree benefit that has a triple tax advantage,” Brown continues. “The employer takes a tax deduction for contributing and funding the retiree life insurance, within certain limits. The funds they set aside to pay for it grow tax-free, also within certain limits. And the death benefit proceeds go to the beneficiary income-tax free.

“So where other retirement benefits, like a pension plan, may get some of the same tax advantages for the employer, and employees aren’t taxed on it immediately, when the proceeds come out they are taxed.

“Life insurance proceeds, though, have that added benefit of tax-efficiency, which can be very advantageous to the spouse or other loved ones who may be responsible for final expenses and funeral costs.”

Prefunding Not Necessary

Brown says there is no need to worry that you may be creating another liability for the company when you decide to purchase life insurance for retirees. “The tax code does encourage, but does not require, prefunding life insurance.

“Obviously, employers don’t want to have a lot of unfunded liabilities on their books. But if I’m looking at implementing a retiree life insurance program for my population, the liability would be relatively small anyway—just the premiums out to the employees’ life expectancies.

“And if I implement a funding strategy in conjunction with it, that liability can be controlled and managed. And because I’m not required to fund it every year, I can fund it within tax guidelines some years, and not in years that are tough from a cash flow standpoint.

“Our studies have shown that more than 50 percent of the population relies on their employers to provide a financial safety net,” Brown explains.

“So I think one of the things that employers need to think about as they are managing talent—and also need to think about in terms of retirement savings—is that it isn’t just your savings and retirement income. It’s also controlling your expenditures.

“A modest amount of life insurance to handle final expenses can be a huge advantage to retirees on a fixed income.”

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