Term insurance can bridge the gap until you retire. – MarketWatch photo illustration/iStockphoto
When you’re raising a family, life insurance matters. If you’re the breadwinner and you die, you want to protect your spouse and young kids from financial hardship.
But once your kids reach adulthood and are independent, you may figure there’s no longer any need for life insurance. That’s especially true if you have little or no debt and enough savings to last a few years even in a worst-case scenario.
So you can forget about life insurance, right?
Probably. But there are exceptions.
If you bought a permanent life-insurance policy in your 30s and 40s, you may have good reason to keep it. The accumulated cash value within the policy can offer financial flexibility as you age, a relatively safe and easy way to save and invest money and, in some cases, a competitive interest rate as your funds grow tax-deferred.
Say you don’t have a permanent policy. In that case, purchasing life insurance in your 50s and 60s can make sense in certain situations — even if no family members rely on your income.
“Sometimes, a life-insurance need continues beyond age 50 and even into retirement,” said Glenn Daily, a fee-only insurance consultant in New York City.
If you live in a state with high estate tax, for example, life-insurance proceeds can help your estate pay those taxes. What’s more, life insurance provides liquidity when your assets are illiquid (such as a closely held business or real estate).
Term insurance can play a role too. Here’s one scenario: You’re 60 and have a sibling or other dependent who struggles financially or faces other challenges. Buying a term insurance policy can protect your loved one for 10 or even 20 years if you die during that period.
Before buying a term policy, ask yourself, “If I die tomorrow, will my loved ones face any financial problems?”
“Maybe having that term insurance will let your spouse stay at home or pay for your kid’s college [if you die],” said Brian Harrison, president of Savvi Financial, a platform that helps employees and businesses optimize benefits and financial planning.
As long as you’re in good health, you can buy term insurance in your 50s and 60s that can bridge the gap until you retire, perhaps covering the last 10 years of paying off your mortgage.
But there’s a downside: While term insurance is priced competitively if you’re healthy and younger, expect to spend much more (and face medical underwriting) when you’re older.
Some term products have a conversion option, meaning they can convert from term — a temporary policy that ends when the term ends — to a permanent policy that stays in force as long as you live and pay the premium. And you won’t need to undergo a medical exam to switch.
Before buying a term policy, Harrison suggests asking, “How long within the life of this term can I convert this policy to permanent life insurance?”
“Not all term polices have conversion features,” Harrison said. “Often, the conversion feature doesn’t extend past 65 or 70 [years of age] and may limit the conversion to the first five or 10 years of the policy. And the older you are, the more expensive it is.”
If you wind up shopping for a permanent life-insurance policy, an agent may discuss two types: whole life and universal life. Regardless of which type you choose, a sizable chunk of your premium will go toward the agent’s commission.
With a whole life-insurance policy, for example, the base commission often exceeds 80% of the premium you pay in the first year. And few agents “will voluntarily reduce their commission to minimum base,” Daily said.
If you’re considering a whole life policy, Daily suggests asking the agent, “What is the minimum base commission as a percentage of the total death benefit?”
“Your goal is to create a lower-commission, higher-value whole life policy,” Daily said. “You can negotiate the commission,” and depending on the agent and the insurer issuing the policy, you can save a bundle and start accumulating cash value sooner.
“All five major carriers [Guardian, MassMutual, New York Life, Northwestern Mutual and Penn Mutual] allow varying degrees of commission reduction on whole life policies,” Daily added.
If you’re weighing any kind of life-insurance purchase, you may want help navigating the complex, confusing set of choices ahead. Agents earn commissions, so they’re hardly unbiased. But there are many honest, knowledgeable ones.
So-called captive agents sell policies from just one carrier. They may earn at least a partial salary from that carrier rather than rely solely on commission, and they work for large well-established companies such as USAA, Allstate and State Farm.
Instead, you may want to seek out an independent insurance professional. Independent agents sell policies from different insurers and can shop around on your behalf.
More: Here’s what happens to your HSA when you go on Medicare — and how to keep up the tax savings
Also read: ‘I feel the clock ticking’: My wife and I are in our 60s — and employ 48 people in a small town. Can we ever retire?
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