Insurance > Life Insurance

Need for life insurance doesn't disappear with age
Associated Press. New York.
Copyright Associated Press

DENVER (AP) - Conventional wisdom says that once children leave home, the need for life insurance is over. Yet for the majority of people, the single biggest asset left to a spouse at death is life insurance.

"The need for life insurance doesn't disappear as you get older, it changes," said Mandell Winter Jr., a senior insurance expert at the College for Financial Planning.

For a family raising children during the 1960s, a modest annual income might have been $10,000, Winter said. That was enough to buy a $25,000 home and a $3,000 car.

Such a family may have also owned life insurance worth $50,000 - five times the amount of its annual income, Winter said. Today, that $10,000 income may have risen to a modest $50,000, but instead of the life insurance also rising, it may have remained at $50,000.

While the absolute amount has stayed the same, the relative amount has gone down to only one times the annual income.

"A $50,000 death benefit doesn't sound like much today for someone in retirement," Winter said.

Granted, you probably don't need as much life insurance relative to income as when you had children. You don't need to replace family income, and your home is probably paid off.

"You may not need the level of protection you needed before, but you need some," Winter said.

To begin with, there is the administrative cost of dying. This can include funeral expenses and out-of-pocket medical expenses. In some cases, an outstanding mortgage may even need to be paid off in full.

"Everyone is looking to be paid off after someone dies," Winter said. "Most people don't want to give up what they've accumulated. The survivor's ability to maintain his or her lifestyle can really be hampered if there isn't an adequate amount of life insurance."

Winter said living expenses for one person aren't necessarily a lot less than they are for two people. Certain bills, such as car insurance, utilities and estate taxes, probably won't decline. Even food costs may not be cut in half because single people usually eat out more often than couples, and eating out costs more than groceries do.

Another benefit of continuing to own life insurance is that it can supplement retirement income. If you handle it very carefully, Winter said, you can take tax-free money out of a cash-value policy, typically in the form of a loan.

Then, at the time of death, the loan is paid off with tax-free benefit dollars. However, you must be careful that the policy doesn't lapse. If it does, you could end up paying taxes on the money you borrowed.

For example, you invest $20,000 in premiums over 40 years and then borrow $150,000 for retirement. If the policy lapses, you'll owe taxes on the $130,000 gain ($150,000 minus $20,000), which is money you've already spent.

Winter said certain policies are better for borrowing than others. A whole life policy, for example, presents less risk of lapsing than a variable universal policy, which is vulnerable to investment market declines.

Another benefit of carrying life insurance as you age is that it can help pay for medical expenses.

More and more insurance companies will pay out a portion of the policy's face value (as high as 90 percent to 95 percent) if you're terminally or chronically ill and the policy has a long-term care benefit.

Without the long-term care benefit, terminally or chronically ill individuals usually get only 50 percent while alive and, at the time of their death, their heirs receive the balance.

If a company doesn't offer such "accelerated benefits" you may be able to sell the policy to a third party for cash. This "viatical settlement" usually pays a smaller percentage of the face value than accelerated benefits do.

Estate taxes may be another good reason to carry life insurance.

"Even though Congress pushed up the amount of estate assets that can be transferred without estate taxes, a large number of people are still going to face estate taxes," Winter said. "It doesn't take long in today's world for even people of moderate means to acquire an estate valued at between $625,000 and $1 million, especially when you throw in the increase in value of retirement plans, your home, and insurance."

While careful estate planning, such as drafting a proper will and using trusts, can minimize or eliminate estate taxes, people often still need life insurance to pay estate settlement expenses, Winter said.

In the end, the exact amount of life insurance you need to keep will depend on your specific circumstances. You can determine how much you need with the help of your insurance agent or financial planner. Just don't automatically assume you won't need any life insurance.

"When someone dies, one of the first questions people ask is, 'Do they have life insurance?' or 'Do they have enough life insurance?'," Winter said. "No heir, whether a surviving spouse, child or someone else, has ever said, 'Oh, I was left with too much life insurance.'"

End advance for Thursday, Sept. 10


Reproduced with permission of the copyright owner. Further reproduction or distribution is prohibited without permission. 
People: Winter, Mandell Jr
The tips on this website should be considered food for thought only. Lendingtips.com is a clearinghouse of ideas, not a professional adviser. Before any important decision, please consult the appropriate professionals (lawyer, accountant, real estate agency, broker etc.).