Older people generally have a better understanding of life insurance than younger people.1 But even if you fully understand the costs and potential benefits of life insurance, you may wonder whether you still need it as you age and your children become self-supporting. Here are some ideas to consider.
Protection for Your Spouse
Even though your children may not need financial support, your spouse might depend on your income, especially if you are still working and/or have debts such as a mortgage, car payment, or student loan, which could be paid off with a life insurance benefit. Losing one spouse’s Social Security benefit could also make it more difficult for the survivor, even with survivor benefits. Widows and widowers aged 55 and older are more likely to live in poverty than married people in the same age group (see chart).
Help for Your Heirs
Although fewer families face federal estate taxes because of the high exemption level ($5.34 million in 2014), other end-of-life costs — medical expenses, legal costs associated with tying up financial affairs, and other final expenses — could be a burden for heirs. Unlike some assets, life insurance death benefits are typically paid relatively quickly, and an insurance death benefit is usually not subject to federal income tax.
A More Permanent Solution
Term insurance is generally the most affordable type of life insurance, but premiums can become more expensive with age, and a term policy provides coverage only for a specified period of time. If you have a term policy that is scheduled to expire, you might be able to extend coverage at a higher premium or convert it to a permanent life policy if that option is available. Another option is to purchase a new permanent life insurance policy.
Permanent life insurance offers a guaranteed death benefit and lifetime protection as long as you pay the premiums. Even though the cost of permanent insurance is usually higher than for term insurance, premiums typically remain level over your lifetime, and a portion of the insurance premium goes into a cash-value account that accumulates on a tax-deferred basis throughout the life of the policy. Not only could this increase the death benefit but you may be able to borrow against the cash value during your lifetime.
Withdrawals of the accumulated cash value, up to the amount of the premiums paid, are not subject to income tax. Loans are also free of income tax as long as they are repaid. However, loans and withdrawals will reduce the policy’s cash value and death benefit. Any guarantees are contingent on the claims-paying ability of the issuing insurance company.
The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure you are insurable. In addition to the life insurance premiums, other costs include mortality and expense charges. If a policy is surrendered prematurely, there may be surrender charges and income tax implications.
1) LIMRA, 2012
The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2015 Emerald Connect, LLC