NEWARK, N.J.--(BUSINESS WIRE)--Whether it’s taking stock of all your potential income sources, making sure you don’t miss out on maximum Social Security benefits or figuring out how to fund post-retirement health-care coverage, there are a number of critical investment decisions Americans in The Retirement Red Zone—the five years before and after retirement—should make.
Prudential Financial can help with those decisions. Its retirement experts have developed 12 practical tips to help you manage financial risks so you don’t see, well, red, in The Retirement Red Zone. And some of these decisions are best made right now, during tax season. This week’s tip marks the seventh in a series that will run through May 6.

Tip No. 7: Evaluate current life insurance needs.

“A common reason people purchase life insurance is to manage income replacement needs associated with parental obligations, like paying for college,” says Rob Fishbein, vice president and corporate counsel in Prudential Financial’s Tax Department. “While these obligations may no longer be critical in The Retirement Red Zone, the need for life insurance should still be considered and evaluated.”

Fishbein goes on to say that purchasing life insurance can be a good way to supplement income for a surviving spouse, who might have to cover living expenses with a reduced income. While the surviving spouse will be able to continue receiving the higher of his or her Social Security benefit or that of the deceased spouse, the lesser benefit will end. Some individuals receiving a defined benefit pension payout may continue at 100% of the amount paid before the spouse’s death, but for others, the payment may be reduced by 50%, depending on the payment option chosen when benefit payments commenced.

“To make matters worse, living costs for the surviving spouse may not be materially reduced, which may be the case if he or she does not move,” Fishbein says. “The overall reduction in household income could adversely impact one’s standard of living. Life insurance is a way to bridge that gap and ensure the surviving spouse does not have to move out of the family home, change his or her lifestyle, or otherwise downsize. “

Other reasons why you might continue to have life insurance needs during retirement, include:

Providing for a special needs child
Making an equalizing payment to a child who does not work in the family business and will not inherit the business
Providing a legacy to children from a first marriage when the individual has remarried
Providing liquidity to pay estate tax for an illiquid estate, such as an estate with real estate holdings or a closely held business
Paying for the purchase of a partner’s interest in a business (and avoiding the surviving spouse or child becoming a partner with the surviving partner).
For those who purchased life insurance to cover parental obligations, and no longer have any clearly identifiable life insurance need, careful consideration should be given before canceling or surrendering the existing policy, Fishbein cautions. Should a life insurance need arise later in life, the individual may no longer be insurable, or may only be insurable with a less favorable, and more costly, underwriting rating. Before surrendering life insurance, the individual should carefully review all existing and potential future needs, recognizing that any decision to surrender life insurance may result in the inability to obtain coverage at a reasonable cost—or any coverage at all.

Another consideration with respect to surrendering a life insurance policy is that you will be triggering income tax on the inside build-up within the policy. While you should not retain a life insurance policy solely for tax reasons, there may be a tax-wise strategy for unlocking the tax liability in the policy over time in a manner that is coordinated with your overall retirement plan. Additionally, starting in 2010, you can exchange a life insurance contract for a long-term care insurance contract, and avoid paying income tax on the gain in the life insurance contract. Therefore, if you no longer need the life insurance protection, but need long-term care insurance, then a long-term care contract can be purchased using the cash value in the life insurance policy. This tax-free exchange can more efficiently leverage your retirement resources. “Even if the primary reasons for obtaining life insurance are no longer relevant, those entering The Retirement Red Zone are well advised to review and consider their current life insurance needs,” Fishbein concludes.

Prudential Financial, Inc. (NYSE: PRU - News), a financial services leader with approximately $648 billion of assets under management as of December 31, 2007, has operations in the United States, Asia, Europe, and Latin America. Leveraging its heritage of life insurance and asset management expertise, Prudential is focused on helping more than 50 million individual and institutional customers grow and protect their wealth. The company’s well-known Rock symbol is an icon of strength, stability, expertise and innovation that has stood the test of time. Prudential's businesses offer a variety of products and services, including life insurance, annuities, retirement-related services, mutual funds, investment management, and real estate services. For more information, please visit www.prudential.com/retirementincome.

Insurance issued by The Prudential Insurance Company of America and its affiliates Newark, NJ.

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Source: Prudential Financial, Inc

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