Parents with young children may be concerned about having enough life insurance coverage to take care of their family's financial needs. As their children grow into self-supporting adults, however, they might wonder whether they still need life insurance at all. It's not uncommon for older policyholders to let a term life insurance policy expire at the end of the term without replacing it.
In fact, life insurance can still help meet some important financial needs even after your children are financially independent.
Term insurance is generally the most affordable type of life insurance, but as the name suggests, a term policy provides coverage only for a specified period of time, and premiums can become more expensive with age. By contrast, a whole life policy, a type of permanent life insurance, offers lifetime protection as long as you pay the premiums, which typically remain level over your lifetime. While the cost of permanent insurance is usually higher than for term insurance, a portion of the premium goes into a cash-value account that accumulates on a tax-deferred basis throughout the life of the policy. Not only could the cash value be used to increase the death benefit, but it may provide some financial flexibility because you can tap into the cash-value account during your lifetime.
Here are three reasons why a permanent policy could play an important role in your long-term financial strategy.
1. Protect Your Spouse
The loss of one spouse's income or Social Security benefit could make it difficult for the surviving spouse to continue paying the same fixed living expenses. And your spouse may face higher taxes when filing as a single individual than you do now as a couple filing jointly. The proceeds from a life insurance policy could help pay off any debt, such as a home mortgage, and supplement your spouse's lifetime income needs. A life insurance death benefit is usually not subject to federal income tax.
Losing a SpouseAcross all age groups, women are three times more likely than men to be widowed. Here are the percentages of women and men age 55 and older who are widows or widowers.
Source: U.S. Census Bureau, November 2019 (percentages do not include widows or widowers who remarry)
2. Supplement Your Retirement Income
During your lifetime, the cash value of a whole life insurance policy is available for emergencies as well as for normal retirement expenses such as housing costs and health care. You can generally make tax-free withdrawals (up to the amount paid in premiums) or use loans to tap into the accumulated cash value. Although policy loans accrue interest, they are free of income tax as long as they are repaid and usually do not impose a set schedule for repayment. While the cash-value component of a whole life policy may be appealing, you should generally have a need for life insurance protection and evaluate a policy based on its merits as such.
Keep in mind that loans from a life insurance policy will reduce the policy's cash value and death benefit, could increase the chance that the policy will lapse, and might result in a tax liability if the policy terminates before the death of the insured. Additional out-of-pocket payments may be needed if actual dividends or investment returns decrease, if you withdraw policy cash values, or if current charges increase.
3. Leave a Legacy
The life insurance death benefit could fund an inheritance for your loved ones or a charitable bequest. It could also provide liquidity that may be needed to pay final expenses, divide estate assets among your children, or meet potential estate tax obligations. Unlike some assets, life insurance death benefits are typically paid relatively quickly. Having cash available could help your heirs avoid selling important assets they may prefer to keep, such as a family home, farm, or business.
Before implementing a strategy involving life insurance, it would be prudent to make sure you are insurable. The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. 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. Any guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company.