Assessing Insurance Needs For Older Citizens
DENVER--Michael Snowdon, CFP, CMFC, and the CFP Program Manager at the College for Financial Planning, has a list of what once were conventional wisdoms: The earth is flat. The sun orbits the earth. Man will never fly. Smoking soothes the throat. Snowdon would like to add one more to that list:
Older people don't need life insurance.
Some people get to a point in their lives when their kids are gone and they say, 'I don't need to worry about life insurance', but most older people need at least some life insurance.
There are exceptions. If no one is financially dependent on you, and all potential liabilities are covered in the event of your death, such as funeral expenses or mortgage payments until the house is sold, then you may not need life insurance. However, even if you're beyond child-rearing and income-earning days, you may need coverage for one or more of the following reasons:
Estate settlement costs. If nothing else, people need funds to pay for the funeral and other costs associated with death. Dying is not free.
Estate taxes. Larger estates face the added potential of estate taxes, which start at 37% for estate assets over $675,000. And that figure may affect more estates than people realize. Inflation alone has pushed many estates into the estate-tax bracket. Life insurance, when it's placed in an irrevocable life insurance trust to keep it out of the estate, can provide the funds to pay for any estate-tax liability.
Adjustment costs. When someone dies, the survivor goes through an adjustment period. It's not uncommon for the survivor to spend a lot of money shopping or going on an expensive vacation. People who are self-employed or who work in a profession that demands a high degree of concentration may suffer some loss of income in the aftermath of a death.
Typically, adjustment costs aren't huge, but few people have an extra $10,000 sitting around. From a life insurance standpoint, however, an additional $10,000 of insurance is available at a very small cost.
Lifestyle support. It's more common now for both spouses to work and to want to maintain their lifestyle should one spouse die, even after the kids are through college. In most cases our relative insurance needs decrease as we get older, but our absolute needs may actually increase because of inflation.
A person earning $10,000 in the 1960s might carry a $100,000 life insurance policy--10 times one's annual salary. But the person might retire today on $50,000 a year. Now that $100,000 policy is only twice annual salary.
Pension maximization. Most workers eligible for pension benefits choose a joint-and-survivor option. This guarantees benefits through the life of the surviving spouse, but it pays the couple 20% to 25% less than the maximum pension benefit. The problem with this approach is that if both spouses die around the same time, or the spouse dies before the pensioner, they've guaranteed themselves a permanent cut in benefits.
Under the pension maximization approach, the retiring worker chooses the single-life option (with the spouse's written consent), which pays out the maximum benefit for the life of the pensioner. The difference between this amount and the smaller amount the pensioner would have received under the joint-and-survivor option is used to buy life insurance. If the pensioner dies before the spouse, the survivor uses the death proceeds to continue to pay for retirement; if the spouse dies before the pensioner, maximum benefits will continue to be paid out. Better yet, insurance purchased for other purposes early in life may be able to pay for itself and fund the desired benefits with no out-of-pocket costs after retirement.
Retirement income. One of the advantages of permanent (whole life) life insurance is that it grows tax deferred. You can build up a fairly significant cash value by retirement, which can be turned into an annuity or drawn on when you need it, especially in the later years when inflation has eroded the buying power of your pension benefits.
What if you don't have sufficient life insurance or it is term instead of whole life? You can shift funds out of conservative assets, such as certificates of deposit or conservative mutual funds, to buy fixed-income life insurance. Critics who argue that people are better off leaving their money in mutual funds should consider that any financial base needs to be conservative. You need adequate savings and insurance before you take investment risks. Life insurance provides part of that base.
