Many of us think of insurance as the product we hope we’ll never need. Indeed, insurance remains a vital part of most financial plans. For many of the important things in life, it makes sense to shift some or all of the financial burden onto an insurance company. And in many cases—your home and your vehicles, for example—insurance is a legal requirement.
As important as it is, though, our insurance needs change over time. A family with young children at home has different insurance needs than a retired couple drawing pensions and income from their investments. Both families need insurance, to be sure, but their risks—and therefore, their uses for insurance—are very different.
First, let’s dispense with some low-hanging fruit: property and casualty coverage and health insurance. Most of us don’t have much choice about the former: if we operate a vehicle or live in a home with a mortgage, our state and our mortgage lender are going to make sure we carry coverage on these assets. While it is still important to make sure your liability limit is high enough on your car insurance and your home policy provides for appropriate replacement costs, most of us will need to pay the premiums for these coverages as long as we drive or live in the home. (And by the way, some estimates indicate that as many as two-thirds of the homes in America are underinsured.) As for health insurance, it’s important to remember that all the proactive planning and portfolio management in the world won’t matter if a catastrophic illness, combined with inadequate health coverage, removes your ability to earn a living and decimates your assets. Even if you’re young and healthy, this is a risk you should definitely shift onto an insurer. For retired persons, it’s vital to make smart decisions about Medicare and Medigap coverage.
Now, let’s talk about life insurance and how the need for it can change over a lifetime. Here’s a good basic principle: If anyone depends upon you financially—that is, if your death would create a major financial burden for someone—you probably need life insurance.
In this connection, most of us immediately think of the breadwinner for a young family, whose untimely death would rob the family of their only financial support. Certainly, this is a situation where appropriate life insurance coverage would provide greatly needed financial security. But life insurance isn’t just for the breadwinner. If one of the spouses, rather than working outside the home, dedicates their time to caring for children or another dependent family member, what would it cost to replace those services in the event of that spouse’s death? Someone will be needed to perform those duties so that the breadwinner can continue working, but that won’t be free. This is another situation where life insurance can provide financial security and continuity for a young family.
Now let’s consider a business owner in their 50s. The kids are no longer at home, and the owner and her spouse derive a good income from the business. Do they still need life insurance? Well, it depends. What would happen to the business if a key employee—the owner or another pivotal individual like a principal salesperson or designer—were to die unexpectedly? Life insurance could be a very useful tool for providing a financial cushion against such catastrophic losses and ensuring the ongoing viability of the business. Or, suppose the business is a partnership. Life insurance could be used to fund a buy-sell agreement that would enable the surviving partner to keep the business intact in the event of a partner’s passing.
Moving a little farther along the life cycle timeline, what about persons nearing or in retirement who have significant assets? If they’re drawing a comfortable income from their holdings, is there any reason for them to pay life insurance premiums? Once again, it depends on a number of factors, including the character of the assets and their intentions for their estate upon their passing. For example, persons whose net worth consists of a significant amount of appreciated real estate might need to consider the impact of estate taxes on their heirs. Depending on the size of the estate, even after allowing for the unlimited marital deduction and the stepped-up basis for their heirs, there could still be a sizeable cost to transfer their wealth to the next generation, if that is their intention. An alternative way to fund this liability, however, could involve the use of life insurance policies owned by an irrevocable life insurance trust (ILIT). In consultation with a qualified estate planner, tax expert, and life insurance professional, both spouses could be insured for an amount representing a careful estimate of the estate tax liability, and upon the death of the surviving spouse, funds in the ILIT could be made available to the heirs to pay the estate tax—more palatable than selling potentially illiquid assets to cover the tax bill.
Here are a few other scenarios involving retired persons where life insurance could prove valuable:
- If you have special needs children who will require medical or other types of care, life insurance can provide for such ongoing expenses after you are gone.
- If you are in a second marriage, life insurance can be used to balance the scales between children and a surviving spouse.
- If you still earn substantial outside income in retirement that is necessary for maintaining your lifestyle, insurance can help to replace a number of years of such income that would go away in the event of your death.
- If you have large outstanding debts (including student loans that you may have cosigned for a child), life insurance proceeds can be used to pay off the debt in the event of your death without the need to liquidate other assets. In fact, according to AARP, 34 percent of homeowners age 65 and older still carry a mortgage; life insurance could keep a surviving spouse from being forced to sell a home in unfavorable circumstances.
- If you have a favorite charity that you would like to continue funding after your passing, a life insurance policy can help to fulfill this purpose.
Finally, here’s a brief summary of the basic types of life insurance. “Permanent” life insurance is more expensive, but the premiums are locked in for the life of the policy and it also has some sort of increasing value over time. The older type of permanent insurance, often called “whole life,” offers guaranteed cash values. The newer type, often called “variable life,” features an investment component that resembles a mutual fund. The second main type of life insurance is called “term” life insurance. As the name implies, this type of policy, while much lower in cost initially, provides a death benefit during a specific term—no savings or investment portion. Also, term life becomes more expensive over time. The key question anyone needs to ask before buying life insurance is whether the need being funded by the policy is temporary or permanent. If, for example, someone is taking out a loan to buy a business and the loan will be repaid in ten years, they might wish to purchase a 10-year term insurance policy to provide funds for paying off the loan in the event of their death before the 10-year term is over.
At The Planning Center, we know that every situation is unique—including the risks. We work with clients to create financial plans that take these risks into consideration, utilizing the financial tools most appropriate for each client’s goals and resources. Our clients’ best interests are always the foremost consideration. To learn more about how we can help you review your insurance and benefits, visit our website.
