Ask Rob

Q  Do I still need life insurance after my kids are out of the house?

Robert M. Slutsky

A  The need for life insurance is very different depending upon your circumstances and so are the types of life insurance to fill those needs. The issue of needing life insurance is a long and drawn out analysis, however, the following are some general thoughts.

Life insurance has two general purposes: 1. To give your family cash to pay expenses in case of your death, and 2. As a savings tool.

Before we get into who needs what, there should be some understanding of the different types of life insurance. The first is term insurance. By its name, this type of policy will only you cover you for a finite period of time, typically 10, 20, or 30 years. In most cases (there are policies that can convert to permanent insurance), once the term expires you will need to purchase a new policy with a new term. This highlights the main disadvantage of term insurance which is that you may still need insurance when the term expires and the cost may be much higher. Term gives you a basic death benefit and nothing else. It does not accumulate cash value or have a savings component. However, if you are young and healthy, this provides the most death benefit for your insurance dollar and is commonly used by younger families with child raising expenses. If, however, you are unhealthy at the time of the termination of the policy and still need insurance, you are going to pay much more money for insurance or may not be able to get it.

The other category of insurance is permanent or cash value insurance. This insurance does not terminate as long as you continue to pay the premiums. The number of permutations of this type of insurance is a book in and of itself. Suffice to say this type of policy allows you to have insurance for your entire life and you only get underwritten once. So if your health declines during your ownership of the policy, the company cannot terminate the policy or raise the premium on you. Some policies focus more on the forced savings component and can create a significant fund of cash value that can be tapped for future expenses. And those policies tend to be more expensive for each dollar of death benefit than a comparable term policy. Some policies generate little in the way of savings but guarantee that the premium will not adjust until age 95, 100 or 105. Yes, these policies are more costly in the short term than a term policy but if you anticipate the need for permanence or just like the additional savings component (and the potential deferral on the taxation of the growth of the earnings in the policies) this type of life insurance policy may work for you. Permanent policies come in several familiar types including Whole Life, Universal Life and Variable Life, all with different components, benefits, costs and downsides.

Typically younger families need more life insurance since there has not been the time to accumulate assets and the expenses of raising a family are most intense when you are younger and your children are younger. They will usually buy term only or a combination of term and permanent insurance. When someone older has a policy it is often a type of permanent insurance because term gets more expensive as you age.

For some, life insurance can be a long term care financing tool as well. Some types of permanent insurance today have contractual riders that allow the death benefit to be accelerated to be used for care during life. This can be beneficial for some people who have difficulty qualifying for long term care insurance or want a policy where they can be guaranteed some benefit for their premium dollars (as opposed to no benefit if you have conventional long term care insurance and you die before filing a claim). As in the rest of life there is no free lunch and the cost per dollar of long term care benefit is higher with this type of policy than a conventional long term care insurance policy.

So the answer about if you need life insurance after the kids are out of the house depends on your situation. Will your death will be a hardship for your spouse or do others rely on you for support? Do you have a savings need that is served by life insurance? Do you want life insurance as a long term care financing option? Are you in a tax bracket where the potential income tax deferral of money in a life insurance policy is worthwhile? If the answer to these questions is yes, than life insurance may still be necessary even if your children are independent.

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