Life Insurance Strategies: Reasons Empty Nesters May Want Permanent Coverage
Published: September 02, 2019
Parents with young children might worry about whether they have enough life insurance to take care of their family’s financial needs if they should pass away. But as their children grow into self-supporting adults, they might start to consider whether they still need life insurance at all.
A whole life policy typically provides a permanent death benefit, as long as the premiums are paid to keep the policy in force. A portion of the insurance premium goes into a cash-value account, which accumulates on a tax-deferred basis. Not only could this increase the death benefit, but it provides some financial flexibility because you can tap into the cash value during your lifetime.
Here are three reasons why a permanent policy could play an important role in your long-term financial plan.
1. Protect Your Spouse
Regardless of your age, your spouse might depend on your income, especially if you are still working and/or have a mortgage that could be paid off with a life insurance benefit. If you are already retired, losing one spouse’s Social Security benefit could also make it difficult for the surviving spouse to continue paying the same fixed living expenses, despite any survivor benefits. Even if your surviving spouse can count on a similar retirement income, he or she may face higher taxes on that income when filing as an individual than you do now as a couple filing jointly. Life insurance could be used to help offset an expected after-tax income gap.
2. Supplement Your Retirement Income
The cash value 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.
Still, 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 death benefit could fund an inheritance for your loved ones or a charitable bequest. It could also provide liquidity that may be needed to divide estate assets equally among your children or meet potential estate tax obligations. Having cash available could help prevent your heirs from being forced to sell 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.