Insurance and annuities: Creating reliable retirement income and protecting your legacy

When you're building your retirement strategy, you can think of insurance and annuities as complementary tools in your financial toolkit. Insurance helps protect your retirement savings from being depleted by unexpected events like medical emergencies or long-term care needs. Annuities, meanwhile, can transform your retirement savings into guaranteed income streams that last as long as you live, helping ensure you won't outlive your assets.

For example, consider a 65-year-old couple with $1 million in retirement savings. Without proper planning, a long-term care event could consume $100,000 or more annually, potentially depleting half their nest egg in just five years. However, by strategically using insurance and annuities, they can protect their assets while ensuring stable retirement income.

As you enter retirement, your insurance needs shift from income replacement to asset protection. Several types of insurance become particularly crucial for retirees.

Long-term care insurance

Seven out of 10 Americans over 65 will need some form of long-term care during their lives. Monthly costs averaged around $10,000 monthly in 2025 for nursing home care in a private room. Long-term care insurance helps protect your retirement savings from these potentially devastating expenses.

Modern long-term care policies offer various options:

• Traditional long-term care insurance provides comprehensive coverage but requires ongoing premiums.
• Hybrid life insurance/long-term care policies combine death benefits with long-term care coverage.
• Life insurance policies with long-term care riders offer flexibility in how benefits can be used.

Life insurance in retirement

Life insurance takes on new importance in retirement planning. While you may no longer need large amounts of death benefit protection for income replacement, permanent life insurance can serve valuable estate planning purposes:

• Providing tax-free inheritance to heirs.
• Equalizing inheritances among children.
• Covering estate taxes.
• Creating charitable legacies.
• Offering living benefits through cash value access.

For example, a second-to-die policy can provide liquidity for estate taxes, ensuring your heirs won't need to sell family property or business interests to cover tax obligations.

Medicare supplement insurance

While Medicare provides basic health coverage, supplemental insurance (Medigap) helps cover deductibles, copayments and services Medicare doesn't fully cover. Most retirees choose between:

• Medicare supplement plans (standardized plans labeled A through N).
• Medicare Advantage Plans (all-in-one alternatives to Original Medicare).

Understanding these options becomes crucial as health care typically represents 15-20% of retirement expenses.

Annuities can help solve one of retirees' biggest challenges: creating reliable income that lasts a lifetime. With traditional pensions becoming rare and Social Security replacing only about 40% of pre-retirement income for average earners, annuities can help fill crucial income gaps.

Types of retirement annuities

Single premium immediate annuities (SPIAs) provide immediate income in exchange for a lump-sum payment.

Deferred income annuities (DIAs), also called longevity annuities, let you purchase guaranteed future income.

Fixed index annuities with income riders combine growth potential with guaranteed lifetime income. These popular products offer:

• Protection against market losses.
• Potential for higher returns than traditional fixed annuities.
• Guaranteed minimum withdrawal benefits.
• Optional inflation protection.

Creating a retirement income floor is an effective strategy that involves using annuities to cover essential expenses while maintaining other investments for discretionary spending. Consider a retiree with essential monthly expenses of $4,000. In this scenario, Social Security benefits might provide $2,500 of guaranteed monthly income, while a carefully selected annuity could contribute an additional $1,500 monthly. This approach ensures that basic living expenses are fully covered by guaranteed income sources, while maintaining investment portfolios for discretionary expenses such as travel, gifts to family and other lifestyle choices. This layered approach provides both security and flexibility in retirement planning.

Annuity laddering represents a sophisticated purchase strategy that can help protect you against several retirement risks simultaneously. Rather than committing your entire annuity investment at one time, you can create a strategic sequence of annuity purchases spread over several years. This approach mirrors the concept of bond laddering but applies it specifically to retirement income planning. By staggering your annuity purchases, you can take advantage of changing interest rate environments while maintaining control over a larger portion of your assets.

For example, you might start by converting 20% of your intended annuity allocation into an immediate annuity at age 65, followed by another 20% purchase at age 67, and continue this pattern through your early retirement years. This methodical approach not only helps you average out interest rate fluctuations over time but also provides the flexibility to adjust your strategy as your income needs evolve.

Additionally, you can select different types of annuities at each purchase point – perhaps choosing some with inflation protection features or others with higher initial payouts – creating a diversified income stream that can better adapt to economic changes and your personal circumstances.

When evaluating these products for your retirement plan, consider:

Income needs analysis

• Calculate essential vs. discretionary expenses.
• Account for inflation over a retirement of 20 to 30 years.
• Consider survivor needs for a remaining spouse.
• Factor in legacy goals for heirs.

Risk assessment

• Evaluate family health history.
• Consider long-term care needs.
• Assess investment risk tolerance.
• Review existing insurance coverage.

Tax implications

• Understanding how annuity payments are taxed.
• Evaluating tax-free death benefits from life insurance.
• Considering Roth conversions with insurance protection.
• Planning for required minimum distributions.

Effective retirement plans often layer different types of protection.

A well-designed retirement protection strategy consists of several interconnected layers working together to provide comprehensive financial security. The income layer builds upon Social Security as its foundation, incorporating any available pension income and strategically selected annuity products to cover essential expenses. This foundation is then supplemented by flexible investment portfolio withdrawals that can adjust to changing needs and market conditions.

The protection layer focuses on preserving your assets and managing risks. This begins with comprehensive health care coverage through Medicare and appropriate supplemental insurance policies. Long-term care protection serves as a crucial shield for your retirement savings, while life insurance plays a vital role in estate planning. An emergency fund provides additional security for handling unexpected expenses without disrupting your broader financial strategy.

The legacy layer ensures your wealth can benefit future generations and causes you care about. Life insurance death benefits provide tax-efficient wealth transfer, while remaining investment assets, real estate holdings and family business interests can create lasting financial legacies. This layer requires careful consideration of tax implications and estate planning structures to maximize the impact of your legacy.

For example, a comprehensive plan for a 65-year-old couple might include:

• A single premium immediate annuity providing $2,000 monthly.
• A deferred income annuity starting at age 80.
• Long-term care insurance with shared benefits.
• Permanent life insurance for estate planning.
• Medicare supplement insurance.

As you approach or enter retirement, developing a clear action plan becomes essential for securing your financial future. Begin by conducting a thorough review of your existing insurance coverage and annuity contracts to ensure they still align with your current needs and objectives. This review should naturally lead into a detailed analysis of your expenses, separating essential costs like housing and healthcare from discretionary spending such as travel and entertainment.

With a clear understanding of your expenses, you can then identify any potential gaps in your retirement income strategy. This analysis often reveals areas where additional guaranteed income or protection might be beneficial. Given the significant impact that long-term care needs can have on retirement savings, take time to evaluate your potential long-term care risks and explore various coverage options that could help protect your assets.

Estate planning considerations should be woven throughout your retirement protection strategy. Think about how you want to preserve and transfer wealth to future generations, and consider whether your current plan effectively addresses these objectives.