- Life insurance needs change overtime, regular review is important to successful financial planning.
- Answering difficult questions about mortality and end of life stages can be helpful for your family and with securing your estate.
- Not all life insurance policies are the same, finding the one that fits your individual needs is key!
You just paid your youngest child’s final tuition bill. Congrats! You still have a few years of mortgage payments left, but you are earning and saving more than ever before. Some of your friends told you they didn’t bother paying their life insurance premiums this year. So, do you still need life insurance at this stage of your life? As with so many things in life—it depends. Below are three questions you need to ask yourself.
- If I died today, would I have enough assets and current life insurance to cover my liabilities? Would my family have enough to maintain their standard of living?
- Okay, I have identified a need. What are my options for life insurance?
- I have an old policy that I no longer need. What are my options?
When working with clients at Soundmark, we create a comprehensive “Client Profile” that encompasses the three possible scenarios above. Before we can help clients start thinking about retirement, education savings, vacations, new cars, second homes, or really anything long term, we must have a clear understanding about where they are today.
The better you understand where you are starting from, the better you can plan and reach your ultimate destination. Along the way, situations and plans change, markets go up and down, but every journey must start somewhere.
The Magical Years
For many successful individuals, the 50s are their highest income-earning and highest saving years. Fingers crossed – the kids are also off the “family payroll” and the large “car-sized” college tuition checks have been eliminated. Those funds can now be deployed to maximize 401(k) contributions and taxable savings. However, the need for life insurance may be greater now than ever before, especially if you are the sole income earner in your family.
I frequently meet with our 50-something clients who purchased 20-year term life policies in their 30s, policies that are soon about to lapse. They’re not sure whether they should renew the policies, find alternatives, or discontinue life insurance entirely. As I mentioned earlier, no two situations are the same.
Below is a series of questions and considerations I use with clients to determine their life insurance needs in their 50s and beyond. Some questions, like question #1 below, are tough to ask because nobody enjoys discussing their demise. Ultimately, I have found most clients feel better once the scenario and discussion is out in the open.
- If you died today, do you have enough assets and current life insurance in your name to cover your liabilities and to allow your family to maintain their standard of living?
- First, do you have a need? If you don’t have enough assets to retire tomorrow, the likely answer is YES–you probably need life insurance.
- As part of this question, we run retirement projections for clients. The projections simulate what their financial life would be like if they retired today. How would they fare if they suddenly stopped saving money because they needed to draw on the portfolio ASAP—i.e. before reaching their planned retirement date. As part of this discussion, we evaluate which expenses would be eliminated if you passed away suddenly, and which debts you would want paid off with the lump sum your family would receive upon your death. For instance, paying off the mortgage or fully funding college for your kids.
Life Insurance Types
- I still need life insurance. Which type should I get? What are my options?
- The simplest form of life insurance, which I most often recommend to clients is a term policy that expires close to the projected date of your retirement. Term insurance is most often a fixed premium for a fixed death benefit over a fixed term, say 10 or 20 years. Most often, by the time you are ready to retire, you have paid off your mortgage, tuition bills, and other large obligations, and have saved up enough to live comfortably in your post-employment years. At this point in your life, you no longer need to protect your family against lost wages and savings and therefore, probably don’t need traditional life insurance.
- Another widely used type of life insurance for middle age folks is a permanent policy. A permanent policy can be either universal life or whole life. The idea is to have a policy that is active as long as you are alive.
- Whether whole life or universal life, I find a permanent policy is best used for estate planning purposes, or as a savings plan for wealthy families. Some permanent policies enable policyholders to receive benefits prior to death if they are diagnosed with a severe cognitive impairment such as Alzheimer’s disease or dementia. These benefits can also be paid if the policyholder is no longer able to perform at least two of the six “acts” of daily living (bathing, continence, dressing, eating, toileting, and transferring). If you have an older permanent policy with a cash value, consider rolling the old policy into a new policy that has benefits similar to long-term care benefits.
Life Insurance Payments
- Suppose I have coverage but decide I no longer have a need for life insurance.
- Congratulations! You are either retired, about to retire, or could retire tomorrow if you wanted to. Depending on the cost and type of your insurance, you have several options:
- If you have a term policy with a few years left on it and the cost still fits within your budget, consider maintaining the policy until the term is up, then drop the policy.
- If you have a permanent policy, consider converting it to a new policy that contains “living benefits” that can act like long-term care insurance.
- Another option for permanent policies is to use policies that contain cash value and use those funds to pay the premiums. This strategy allows you to stop paying premiums out of pocket, but still have the insurance active for several more years.
Insurance Policy Review is Key
Regardless of your situation, it’s very important to review your life insurance when you are in your 50s. These may be the years in which your family health history starts to become a serious concern, if not a reality. It’s also when the thought of your own mortality increases your desire to ensure your family is well taken care of after your death.
Bottom line: Make sure you are very clear about what you currently have, what you currently need, and how best to fill the gaps in-between.
If you or someone close to you has concerns about their life insurance needs, please don’t hesitate to contact us. We offer complementary initial consultations through our Second Opinion offering.
James Nevers,CFP® is a Senior Advisor at Soundmark Wealth Management, LLC. James works closely with physicians, business owners, directors and executives at Amazon, Microsoft, and Boeing, and other successful individuals to help them define their financial goals and implement an ongoing financial planning process.