When you’re just starting out — getting married, raising a family — life insurance is a no-brainer. If your spouse or children are counting on your income, the life insurance will continue to provide a financial safety net for them upon your death. But once you hit your 50s or 60s, the life insurance decision is a little less clear. You may no longer need life insurance (and can save yourself the cost of the annual premiums) or you may be better off converting the policy you have into a different type of life insurance.
Here’s why: You now likely have more assets than when you were younger and your children may be working themselves. So your partner and children may be able to manage without your paycheck.
“When you’re talking with most people in their early 60s who have life insurance, the question becomes, ‘If you were to pass away now, do you have enough funds in place that your spouse or your children would have enough?’” says Ben Tobias, a financial planner in Plantation, Fla. “That’s the question that you have.”
Convert or Buy?
If you have no need for life insurance anymore, you’ll probably want to cancel the policy. But if you’ve decided you still need insurance and you own term insurance, you have two options: Convert your old policy to a “permanent” type of life insurance such as whole life, variable life, or universal life (which provides insurance plus an investment component) or buy a new term policy.
You may get a better deal buying a new term policy if you’re in good health or have only minor pre-existing conditions. A 60-year-old, non-smoking man in great health would pay about $115 a month for a 10-year, $500,000 term policy. A 60-year-old woman would pay about $83 a month.
By your early 60s, however, there’s a good chance you have health issues that will make term life insurance prohibitively expensive or completely unprocurable. For you, converting from term to permanent insurance may make the most sense, because you can do it without a medical exam.
Next Avenue asked experts to address a few scenarios that can help you determine whether to continue owning life insurance. And, if so, which type of policy:
If Your Children Are Grown
For many parents, life insurance exists as a safety net for their dependents. That is, if you die, the insurance benefits would help replace the loss of your income to pay for your children's expenses and future college tuition. But if your children’s college education is in the rearview mirror, you no longer have that huge expense staring you in the face. Even if your children are on their own but struggling financially, you may have saved enough so that proceeds from your estate will help them meet their future needs. In these situations, you might want to cancel your policy and call it a day.
If You’re Still Making Mortgage Payments
Insurance proceeds can come in handy to help pay for the mortgage after you die. So you’ll want to determine whether your spouse could handle the monthly payments without your income and without depleting his or her retirement assets. If the answer is no, then keeping your life insurance isn’t a bad idea, at least in the short term. You can always cancel the policy once the mortgage is paid off.
If You Have a Pre-existing Condition
Converting your life insurance policy when you’re in your 60s or so is generally a gamble, since you could end up paying premiums for two or three decades before the policy pays off. But if you have cancer, heart disease or another serious medical condition, it may be a bet worth taking. “We have clients who absolutely have no need for insurance, but have developed illnesses,” Tobias says. “They say, ‘I know I’ve only got a few more years left, so at this point, it’s a good buy for my kids.’ You’re betting that you’re going to die sooner and that your kids will have more money.”
If You Want to Leave More to Your Heirs
This is a very personal decision, but in general, experts think there are better ways to boost your investment assets than converting a term life insurance policy to a permanent policy with an investment component. “I like having as much choice for investment decisions as I can, and having your money with one insurer isn’t what I call optimal investment allocation,” says Bill Heidig, a financial planner in Lancaster, Pa.
In other words, it may be wiser to cancel your insurance policy, take the money you would have spent on premiums, and stow it in a low-fee brokerage account or IRA instead, where you can pick low-cost, diversified mutual funds. “In the long term,” Heidig says, “I’d say that flexibility will provide a greater tool to achieve more appropriate results.”
If Your Estate Might Be Taxed
This year, estates of less than $5.12 million are not taxed. But what that threshold will be in the future is anybody’s guess. If you have a significant estate — more than $5 million in 2012 — and there’s the potential for taxes to take a considerable bite out of the assets you’ll leave your heirs, it may be wise to keep some life insurance. “If someone has a taxable estate, life insurance is often used to fund the payment of that tax,” Tobias says.
If using life insurance for estate taxes is your goal, consult a good estate planning attorney, because it’s important to set up the life insurance policy in a trust. “If it’s done correctly, when you pass away, the money isn’t included in the value of your estate, but gets used to pay the estate tax,” Tobias says. Find a nearby estate attorney at the website of the American College of Trust and Estate Counsel
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