Do I need life insurance after age 60?
While you are working and raising kids, purchasing life insurance is an important component of your personal financial plan.
However, as you approach retirement, you may wonder if you still need your life insurance policy.
Why do we buy insurance?
The purpose of insurance products is to transfer the risk of a catastrophic event. In essence, we pay a small premium so that whatever was lost can be restored without a tremendous expense.
We buy homeowners insurance because we couldn’t afford, on our own, to rebuild our house after a tornado destroys it.
We buy auto collision insurance because we couldn’t afford to - or could, but don’t want to - pay for a new car after a major accident.
We buy life insurance so the people who depend on us, financially, will not be burdened by our premature death.
Insurance protects you from catastrophic loss. Thinking about why you have insurance helps answer the question of if you still need it.
Who needs life insurance?
Imagine a classic nuclear family with one working spouse and one stay-home spouse. The income of the working spouse supports both the current needs of the house (food, rent, etc) and the long-term needs (retirement savings). If the working spouse were to die, and the family is left with no income and few assets, they would be in a very dire situation, financially; the non-working spouse would need to find a new income and would need to find childcare.
Now consider where you are today. If you have kids, they are probably out of the house and partially or wholly independent. If you’ve been working for 25-30+ years, you likely have some money saved in an IRA or 401k. You likely have accrued a decent Social Security benefit, which is available to your spouse as a survivor benefit at their age 60. Perhaps you are living in a house without a mortgage. Alone, each of these things would reduce the financial impact of your death. When put together, it becomes clear that life insurance is less impactful the older you get.
The relevant factors of the decision
Your financial dependents
As I mentioned earlier, your children are likely transitioning or fully transitioned to independence. Unless you are providing for an adult child or a parent, it’s likely just you and your spouse to worry about.
Ask your spouse the kind of lifestyle he or she would like to live when you are gone. It’s certainly not a pleasant conversation, but it is the first step in determining the amount of income needed to support your spouse should you die prematurely.
Duration (or term) of current or potential insurance policy
Term policies (a policy in force for a specific number of (e.g. 30) years) usually have “level premiums”. In short, the insurer calculates the cost to insure someone for 30 years, and then smooths that cost over the duration of that 30-year term so the monthly premium does not change. Effectively, younger-you is prepaying the cost of insurance for older-you.
A level premium term life policy will increase premiums substantially once the term is over.
As an example, this author owns a term-life policy in force through age 55. At age 56, my monthly premium increases from $39 to $552, the latter of which is the actual cost for term insurance at age 56. If I were making this decision at age 55, the table to the right illustrates why it’s probably a good idea to pay the last year of term insurance if the premium is affordable.
Whole-life policies are a completely different beast. Many whole life policies have cash value or other surrender options. They are all different, so you should contact your insurance company to find out what your options are. I don’t recommend whole life policies - more on that later!
Other assets / sources of income
Ultimately, you want to know how much after-tax income is available to your spouse in the event of your death. This income will come from a combination of retirement accounts, Social Security, and other pensions or annuities.
If you don’t know how much income you could generate with your assets, consider engaging a financial professional to help.
Book a free consultation with 402 Financial.
So, do I need life insurance?
Ultimately, the decision comes down to personal preference and your willingness (and your spouse’s) to bear the risk of your premature death. Just like with other forms of insurance, there will always be a trade-off between current premiums and potential future expenses.
Once you’ve considered the relevant factors above, answer the following questions to point you to the answer.
Is my spouse comfortable with the amount of income we could generate with our existing financial assets?
Would we be comfortable paying the life insurance premium if we knew it would never pay off (i.e. if I didn’t die within the term)?
Would paying the life insurance premium interfere with our other goals? In other words, are we worrying too much about what would happen when we die that we forget to enjoy the time we have together?
Would we be better off with a smaller insurance policy? Many policies allow you to reduce your face value, which would reduce your premium as well.
A note on whole life insurance
I am opposed to whole-life insurance products for most people. To bring back an analogy from earlier, how much would your homeowner’s insurance cost if the insurance company knew with 100% certainty that your home would be destroyed by a tornado in the next 30 years? That is exactly how they price whole life insurance policies.
The whole-life insurance industry uses fear and (in my opinion) sleight of hand to get people to buy their products. If you are currently considering purchasing (or already have purchased) a whole-life policy, I would strongly recommend seeking a second opinion.
About the Author
Joseph Fowler, CFP® is a financial planner and co-owner of 402 Financial in Lincoln, NE.
402 Financial provides financial planning and investment management services to people approaching or in retirement. Joe always acts as a fiduciary and never takes commissions on product sales.
Click this link to schedule a free consultation with Joe.
