Retirement savings as life insurance?

Archived From: Finance
  • Page :
  • 1
  • Text Only
Voting History
rated:
Tried to search and came up empty.  Google just seems to pull whole life insurance discussions. Hoping to reap the benefits of the brain trust in this form.

I was wondering if I'm off base for thinking to use my retirement accts as a replacement for life insurance.  Did some cursory searching for rates and it seems to be an awful lot of $ just in case if my current stash can do the trick.

45 yr old single male/smoker
Child is 13 and splits time at mom's who is remarried and OK financially.
About $315k in various retirement accts (200k 401k, 100k in a Roth 401k, and 15k Roth IRA) and have about $200,000 life insurance thru employer of 8 yrs for a few bucks a month (I realize employment can change any time so maybe best not to count this). Only went 2.5 months without a job in last 20 years with 2 employers.
Have about 14k in a 529 plan for college and has unknown amount saved by mother's family.
Owe 158k on a $220k house
No other recurring debts

Am I wrong to think that these accts should be sufficient to qualify as life insurance.  Maybe I couldn't find a lot of info because I'm crazy to think this so no such info exists. I just don't want to put money where it doesn't need to be spent. I don't even know if this money would be available until the age of 18, but I'm confident in the employment of her mom and her husband until then.  Then this should be plenty to cover college which actually would mean her mom wouldn't have to save for it anymore, making it even easier for them.

What are the flaws in this thinking?  Thank you in advance for any input!
 

Member Summary
Staff Summary
  • Also categorized in:
Thanks for visiting FatWallet.com. Join for free to remove this ad.

Why do you care how easy your ex-wife's new husband has it? Pay the minimum child support amounts required of you via court-ordered wage garnishment and not a penny more. Only pay for college if a family court judge orders you to pay for it.

If you want to leave all your assets to your kid should you meet an untimely demise, work that out with a trusts/estates/eldercare attorney in your state.

If you want to have a term life policy naming your kid as sole beneficiary, that would be nice, but the payout money should probably be put into a trust until the kid at least finishes high school and maybe college. More importantly, the executor of the trust should be someone in your family, not your ex-wife or anyone in her family.

In fact, leaving your current assets to your kid should be done via trust just as with any life insurance payout, so you really should talk to an estate lawyer about a trust, since your kid won't be legal age for another five years.

If you want to gift money to your kid while you're alive, that would be very generous of you. And probably not too smart, at least not until she actually needs it. Right now, she doesn't need it, because her mother is responsible for her.  LET EX-WIFE AND NEW HUBBY PAY FOR EVERYTHING FOR AS LONG AS POSSIBLE.

Oh and try to quit smoking. It's an expensive habit.

It isnt life insurance. You just might not need additional life insurance. If you were to die today are those assets enough to pay for things you want paid for? If it is then you dont need additional insurance.

One thing I notice, stradovinski, is that all the money you mention is tied up somehow.

You need enough for a burial.
You might want enough to pay off the home loan. Who inherits the home when you die?
The 529 is light. I've got 2 kids now in college, and 14k will not pay for a year, in state, at a state university here.

When you die, I assume the retirement goes towards the kid. I assume (check me on this) that when that happens, even if child's a minor, child will start collecting required minimum distributions on it. Those can be put in the 529, if the custodian chooses to do so.

I guess I would suggest a minimal life insurance policy until you have enough cash on hand to handle what you want handled when you die. But yes, if you have sufficient moneys invested outside retirement to take care of what needs to be handled, you don't need life insurance.

All of your liquid assets are fair game to replace life insurance. I'd discount the retirement plan funds by whatever taxes and penalties your survivor would pay to liquidate them. I have no idea if what you have, properly discounted, is enough or not though. I'm assuming your obligations for child support stop upon your death. Maybe leave your estate to your child?

Thank you for the replies!
DTASFAB - First I was never married and there is no court ordered anything so I'm the luckiest guy alive in that regard. My only comment about the new husband/wife finances was just to point out that my daughter would go full time into a household with parents that are employed and could handle it on their own. Should I experience the untimely demise I just want to make sure I've done my part since they run a small business and situations there can change fast. I'm fortunate enough that we just make it work based on our jobs, and no one pays child support or has set visitation times.

Good point about the trust. That's something I'm trying to learn about to see if it's necessary or if I can just name my daughter as beneficiary on my accts. If I can avoid the lawyer fees all the better.

I also agree that smoking is the worst health and financial habit I have. Tough to do but quitting is in the plan.

Dodson and micha8s - that's what I was looking for was whether I could substitute those assets for a life insurance policy. I'm thinking I have enough to cover what I want which is paying for college.

The tough part is I'm not looking to leave anything to my ex. She hasn't been known to handle money well in the past, and only since getting married seems to have it together.

Good point about the burial. For now I do have the employer life insurance to cover that. I'm hoping to remain employed, and couldn't the Roth contributions over 5 years old (~$5000) and I have about $15000 in the bank as emergency fund.

Yes all the $ would go to my kid. I guess I don't fully know all the nuances of how they transfers and how quickly. For college, I understand the 529 is light but with me gone I assumed the retirement $ would take care of that. I do contribute to the 529 regularly should I happen to live

Thank you for your perspectives. If you have anything to add after my response fire away.

micha8s said:   One thing I notice, stradovinski, is that all the money you mention is tied up somehow.

You need enough for a burial.

 

  
That all depends on where you want to end up.  Cremation isn't that expensive.  You could also pre-plan and pre-pay for whatever you want.  

I would think that additional life insurance is unnecessary in your case and will be more expensive since you're a smoker.  

If everything will go to your daughter upon an untimely demise, a will is a must.  A trust since she's a minor might be a good idea.  Make sure to put the documents in a safe place where people know where they are.  We just dealt with a death in the family where the original will and trust documents had disappeared.  It was a mess.  The original lawyer was no help at all so a new lawyer was hired to get everything back in place.  I think the whole thing cost about $1500 but would have been less if the original lawyer ever knew what he was doing in the first place.  Long story.  For something as simple as yours, check out one of those online things like Legalzoom or whatever it is.  I think it can probably walk you through what you need for a lot less.

And quit smoking.     It takes 10 years or so off your life.  

One note is that if the beneficiary of your retirement accounts is not a spouse, if they cash out - vs rolling them into an inherited IRA, the whole amount will be taxable as ordinary income so that's a significant hit. Still given your assets, it should be enough to pay for daughter's college expenses. I wouldn't take out life insurance if that's all the financial needs your heir will face.

I also second the will w/ living trust. If you died before daughter is 18, her guardians would be in charge of making financial decisions on her behalf, for her benefit, but yeah taking her along with them to Fiji would be for her benefit too... You'd have no say in how the funds are distributed. If you want funds to become available only for her college education or distributed in tiers, say at 18, 24, and 30, you'll need to put those instruction in the trust setup.

I think you're in a great position (which could always be improved...), especially with the employer provided insurance. If you get a to a point where you are looking to consider retirement, you could start prepaying for funeral expenses... my wife keeps nagging me to do that but, I don't plan on dying and I have significant life insurance right now.

As far as college expenses, you're find there too.  $14k is perfectly fine and I probably wouldn't save up a ton more for one kid.  Work with the kid to keep expenses low, then anything else, you can use the $14k and rinse new funds through for any applicable state tax credits, in the future.

Dus10 said:   ...
As far as college expenses, you're find there too.  $14k is perfectly fine and I probably wouldn't save up a ton more for one kid.  Work with the kid to keep expenses low, then anything else, you can use the $14k and rinse new funds through for any applicable state tax credits, in the future.

  
What?

14k wont' cover much college.

And what do you mean by "rinse new funds"? 

 

No, you do not need life insurance.
Yes, you need estate planning. 

stradovinski said:   Good point about the trust. That's something I'm trying to learn about to see if it's necessary or if I can just name my daughter as beneficiary on my accts. If I can avoid the lawyer fees all the better.
That would be penny wise and pound foolish. You definitely need to set up a living trust with a lawyer knowledgeable in estate planning.

In your situation Trust is the must if you do not want child's mother to have access to your money. You really need to talk to estate lower and I agree on stop paying for life insurance unless there is a possibility for you to go broke before you die (devastating illness can empty your pockets very quickly)

iLoveTahoe said:   
That would be penny wise and pound foolish. You definitely need to set up a living trust with a lawyer knowledgeable in estate planning.

This.  If you take nothing else from this thread, take this.

Don't dodge a few hundred bucks to set up a trust - get it done, and done the way you want it.  With a trust, you could even influence future behavior - i.e. daughter only gets funds after successfully completing college, or whatever else you might want to do.

It's also good for your daughter - if you are gone, she's going to be upset and it's good to have a trust in place to make final arrangements and settlement that much easier.  

If you won't set it up for you, do it for her.

Thanks again everyone for all the advice. I will make the next project on my list to get my estate planning completed. I used to run all my life questions by my dad until he passed last year. I don't really feel any of my friends are up to the task to provide good advice. They aren't bums, but I think I'm at least on par with some and ahead of most with financial matters. I always like to get other opinions to make sure I'm on the right track and not missing something.

Glad I found this forum to throw things like this out there. I appreciate everyone's input and will put your recommendations into action.

stradovinski said:   Thanks again everyone for all the advice. I will make the next project on my list to get my estate planning completed. I used to run all my life questions by my dad until he passed last year. I don't really feel any of my friends are up to the task to provide good advice. They aren't bums, but I think I'm at least on par with some and ahead of most with financial matters. I always like to get other opinions to make sure I'm on the right track and not missing something.

Glad I found this forum to throw things like this out there. I appreciate everyone's input and will put your recommendations into action.

  One more plus to set up a proper trust since your daughter is a minor. Simply naming her a beneficiary on your accounts is not going to help. You will need to decide on a trustee who you trust to take care of your daughter's financial needs in your absence --- in this case, it looks like that will not be your ex/daughter's mother.

Carefully decide who the trustee should be and make sure they are aware of it and willing/able to take on the responsibility. Particularly when it comes to coordinating with your daughter and her mother about your daughter's needs. Think logically (not emotionally) whether your daughter's mother is really not the best person to make those decisions. You may not have the best of relations with your ex, may have parted on less than amicable terms, and you may not think much of her. But carefully consider whether she is a good mother for your daughter (not necessarily a good partner for you) and will do the best for your daughter in your absence.

I am not necessarily saying the daughter's mother is a good choice as a trustee for your daughter's trust. Just asking you to take your personal feelings for your ex out of this and just consider who will be best able to take care of your daughter's interest in your absence.
 

jerosen said:   
Dus10 said:   ...
As far as college expenses, you're find there too.  $14k is perfectly fine and I probably wouldn't save up a ton more for one kid.  Work with the kid to keep expenses low, then anything else, you can use the $14k and rinse new funds through for any applicable state tax credits, in the future.

  
What?

14k wont' cover much college.

And what do you mean by "rinse new funds"? 

 

  $14k is fine if you are having the kid keep their expenses low by choosing an affordable school, doing credit by examination, etc.  And by rinsing new funds, I am referring to how 529 accounts work in many states.  Many states offer a state tax credit... so, if you have no more funds in the account and need to pay some expenses, you deposit the money in the account, then you immediately (or as slow as it takes for things to be credited) pay your expenses through it.  You still get the tax credit, in that instance.

I am not saying that $14k is going to cover every circumstance, but it could cover a couple of years of community college and then some.  Many community colleges have scholarships for degree recipients that go on to 4-year programs.

It's called being creative.  You don't have to spend tons of money to go to school, necessarily.  I am paying $0 for my eldest (thanks to her employer's tuition assistance program)... we'll see how things work for the next two.

Dus10 said:   
jerosen said:   
Dus10 said:   ...
As far as college expenses, you're find there too.  $14k is perfectly fine and I probably wouldn't save up a ton more for one kid.  Work with the kid to keep expenses low, then anything else, you can use the $14k and rinse new funds through for any applicable state tax credits, in the future.

  
What?

14k wont' cover much college.

And what do you mean by "rinse new funds"? 

 

  $14k is fine if you are having the kid keep their expenses low by choosing an affordable school, doing credit by examination, etc.  And by rinsing new funds, I am referring to how 529 accounts work in many states.  Many states offer a state tax credit... so, if you have no more funds in the account and need to pay some expenses, you deposit the money in the account, then you immediately (or as slow as it takes for things to be credited) pay your expenses through it.  You still get the tax credit, in that instance.

I am not saying that $14k is going to cover every circumstance, but it could cover a couple of years of community college and then some.  Many community colleges have scholarships for degree recipients that go on to 4-year programs.

It's called being creative.  You don't have to spend tons of money to go to school, necessarily.  I am paying $0 for my eldest (thanks to her employer's tuition assistance program)... we'll see how things work for the next two.

  

OK.  
But AFAIK only Indiana and Utah offer tax credits for 529.      Most states offer deductions which do have value as well, but usually only up to the marginal rate of the state in question, i.e. 5-10% range.  

 

jerosen said:   
Dus10 said:   
jerosen said:   
Dus10 said:   ...
As far as college expenses, you're find there too.  $14k is perfectly fine and I probably wouldn't save up a ton more for one kid.  Work with the kid to keep expenses low, then anything else, you can use the $14k and rinse new funds through for any applicable state tax credits, in the future.

  
What?

14k wont' cover much college.

And what do you mean by "rinse new funds"? 

 

  $14k is fine if you are having the kid keep their expenses low by choosing an affordable school, doing credit by examination, etc.  And by rinsing new funds, I am referring to how 529 accounts work in many states.  Many states offer a state tax credit... so, if you have no more funds in the account and need to pay some expenses, you deposit the money in the account, then you immediately (or as slow as it takes for things to be credited) pay your expenses through it.  You still get the tax credit, in that instance.

I am not saying that $14k is going to cover every circumstance, but it could cover a couple of years of community college and then some.  Many community colleges have scholarships for degree recipients that go on to 4-year programs.

It's called being creative.  You don't have to spend tons of money to go to school, necessarily.  I am paying $0 for my eldest (thanks to her employer's tuition assistance program)... we'll see how things work for the next two.

  

OK.  
But AFAIK only Indiana and Utah offer tax credits for 529.      Most states offer deductions which do have value as well, but usually only up to the marginal rate of the state in question, i.e. 5-10% range.  

 

And there is an annual limit in many cases, typically in the $2,000 to $2,500 range.

It is a good tip though.  If you put $2,000 in the 529 today and draw it back out to cover expenses tomorrow, and your state tax rate is 8%, you just made yourself $160.  This is also a good approach if your state 529 is really a crappy plan, but you don't get a tax deduction for contributing to an out of state plan.  You put the bulk of your funds in whatever 529 you want, but you wash the annual maximum through your own state plan to get the tax benefit.



Disclaimer: By providing links to other sites, FatWallet.com does not guarantee, approve or endorse the information or products available at these sites, nor does a link indicate any association with or endorsement by the linked site to FatWallet.com.

Thanks for visiting FatWallet.com. Join for free to remove this ad.

While FatWallet makes every effort to post correct information, offers are subject to change without notice.
Some exclusions may apply based upon merchant policies.
© 1999-2017