It seems like I’m always seeing advertisements on TV for life insurance. There are almost as many as reverse mortgage advertisements. Interestingly, it seems like older people are the main targets, including retirees. There are also ads from companies wanting to buy old insurance policies. As a retiree in one of those commercials said, “We sold our policy and now have money to add to our retirement.” (I’ll discuss cashing in old policies that you don’t think you need later in this article.)
Did you know that you can buy life insurance for your car, your house, and even your credit cards? (I imagine there is pet life insurance too, but I haven’t run across that yet.) To be fair, you’re not actually insuring those things if they die (that’s called an extended warranty); you’re buying life insurance so your survivors can pay off what is owed on those things if you die.
One particular life insurance commercial goes something like this: “For only $9.00 a month a 45 to 85-year-old can get up to $25,000 of life insurance with XYZ insurance company to secure your family’s future.” What?! Secure my family’s future with a $25,000 life insurance policy? And, which family – my wife, my adult children, and my grandchildren, or my dog?
Not to be morbid about it, but they’re actually talking about funeral and burial expenses. That’s about all that $25,000 would cover, although there may be enough left over to pay off some small debts depending on how elaborate your funeral is.
The real question is whether you need $25,000 of life insurance, or any amount for that matter, at age 60, 70, or even 80 years old.
Well, everyone’s situation is different (age, season of life, financial position, etc.), so there is no one-size-fits-all answer to that question. So, in this article, I’ll discuss the things you may want to consider if you are thinking about purchasing a policy at any age, or if you have one and are wondering if you should keep it in retirement.
What is life insurance?
Life insurance has one primary objective: replacing a person’s income in case of their untimely death. If that’s your main goal, then you probably need what is called fixed term life insurance (sometimes also called level term). That type of policy insures you for a given period, usually between 10 to 30 years. The cost stays fixed during that entire term. At the end of that period, if you still need insurance, you have to purchase a new policy, probably at a higher rate.
Term insurance is lower cost relative to the amount of death benefit provided, so it tends to be preferred by young families who are just starting out. But others who for one reason or another also need life insurance may find it beneficial, including retirees.
There are also annually renewable term policies. They are the same as term life except that the premiums increase each year. It can be a good option if you only need the insurance for a few years. Examples would be that you are close to retiring or paying off your mortgage. Few will require such a policy, and a regular 5- or 10-year fixed term policy is probably a better choice.
Whole life (sometimes also known as “permanent” or “universal” life or “indexed universal” life insurance) doesn’t have a set term. It can last your entire life unless you let it lapse or surrender it.
Whole life insurance is a lot more expensive than term insurance. For that reason alone, families with average incomes (in the $50,000 to $100,000 range) tend to stick with low-cost term life. Wealthier people with incomes over $200,000 may want to consider whole life for reasons other than basic life insurance purposes.
One of the most important aspects of whole life policies is that they pay annual dividends. That’s because the insurance company is investing the premiums on behalf of the policyholders and returns a portion of the income to them. The dividends can increase as the cash value of the policy increases.
The cash value is essentially the surrender value, less any penalties and fees, of the policy any time before death. Therefore, as people age and the cash value of their whole life policies increase, they are naturally tempted to cash them out to provide additional money for retirement.
That may or may not be a good idea, depending on your situation.
Is life insurance biblical?
The Bible does not address life insurance specifically. However, there are biblical principles that we can look to for guidance.
For example, God clearly wants us to provide for our families as demonstrated in 1 Timothy 5:8: “But if anyone does not provide for his relatives, and especially for members of his household, he has denied the faith and is worse than an unbeliever” (ESV). Life insurance is just one of the many ways we do that.
Elaborating on this, Randy Alcorn says,
Because no parallels to the kinds of insurance policies we buy today are mentioned in Scripture, it’s impossible to prove that life insurance is right or wrong. Some would consider insurance as a legitimate way of providing for their family. Others see it as a lack of dependence on God. The sin of presumption could be committed in either case.
Well-meaning Christians have different perspectives on this, but in my opinion, the act of buying insurance doesn’t in itself show a lack of trust in God. Instead, it demonstrates wisdom and proper planning. But looking to insurance rather than to God for our security makes it an idol that has replaced God as the ultimate source.
What insurance is particularly good at is protection from catastrophic losses. Not preventing them altogether, of course, but helping to minimize their impact. Therefore, I tend to view insurance as an important part of a broader financial plan. It is something that can help in the event of a major illness or disability. It can provide replacement income for the loss of a spouse. And it can help repair or rebuild a home lost through some disaster. Even though insurance can never cover every possible scenario, it can nonetheless be a wise way to protect the assets and income God blesses you with.
But we also need to keep in mind what Randy Alcorn pointed out and be careful not to put our ultimate hope in insurance as though it is a replacement for trusting God. That will require a balance between thoughtful planning and faith in God, which may result in purchasing enough insurance to protect your family and no so much that it limits your dependence on God.
We can also find some guidance from Proverbs. For example, Proverbs 22:3 and 27:12 say, “A prudent man sees danger and takes refuge, but the simple keep going and suffer for it.” (ESV) This seems to suggest that we should assume that in this life there will always be some kind of danger or calamity ahead, and do what we can (within reason, of course) to avoid it. (Or at least seek to minimize our losses.) If we do not and move ahead with no concern for the future, we may experience even greater loss than we would have otherwise. This is more of presumption than wisdom and faith and is not what the Bible teaches.
What kind of insurance do you need?
If you think that life insurance is a prudent thing to have to protect your family (and I would say that for most people it is), what should you do?
Interestingly, the financial community is split on this question. Many planners/advisors strongly favor purchasing whole or universal life insurance, whereas others are firmly in the term life camp. Their advice is often along the lines of the income ranges I mentioned above.
Generally speaking, I am in the term life camp. I had a couple of small whole life policies when I was younger (I was “sold” them by a very persuasive salesman), but I surrendered them a few years later. Since then, I have only owned fixed-term insurance. Although I am nearing retirement age, I still own a 20 fixed term life insurance policy that will end when I reach age 70. If I retire before age 70, I will need to make a decision whether to keep the policy or not. I will probably terminate it.
That doesn’t mean that I think other types of life insurance are never, ever appropriate. There are cases where it may be, such as after you max out your 401(k) and Roth IRAs, or you reach a certain income level and can no longer contribute to a Roth IRA and therefore lose its tax-free investing provisions. You can still put after-tax money into tax-sheltered whole life insurance (although an annuity may be a better option.)
Whole life and certain kinds of annuities allow high-earners to benefit from tax-free growth that may become a source of retirement income in the future. Of course, whether someone needs that additional income is another matter.
Whole life insurance can also allow high-earners to provide a fairly safe legacy for their heirs. You could invest your non-insurance assets more aggressively, and even if they are down significantly at the time of your passing, your heirs will still receive the fully amount of the life insurance payout.
But for most people most of the time, term life is the way to go.
Dave Ramsey is a proponent of separating one’s “investing life” from one’s “insuring life.” He suggests buying fixed term life insurance because it provides the maximum coverage at minimum cost and investing the cost difference (between term and whole life) in a Roth IRA. I agree with Dave for the most part, but with the caveat that there is no such thing as a “one size fits all” when it comes to life insurance.
How much insurance do you need?
This can get a little tricky. Many advisors would say that you need enough to fully fund all of your family’s current and future financial obligations. So, if your income is $50,000 and you need 20 years of expenses, you would simply multiply $50,000 by 20 and purchase $1,000,000 of term life insurance. It the term is 10 years, then you’d only need $500,00o; but if it’s 30, you’d need $1,500,000. However, there is another way to look at this that could save you some money.
If you divide your annual income of $50,000 by the amount of interest you could realistically expense to earn on it – say 5 percent (or .050) – then you can get an idea of how much money you’d need to have sitting in an account earning that amount of interest to generate $50,000 per year of income, indefinitely. (That is equivalent to a multiplier of 20.) In this example, it would be $1,000,000. The amount would be the same regardless of whether you are planning for 10, 20, or 30 years. But there is some unpredictability and nuance to life that could serve to mitigate the requirement for such a large policy.
First, the reality is that, depending on the age of the deceased income earner, most families will “move on.” (Sorry, but it’s true.) For example, the surviving spouse may remarry. Or, the family may downsize their house. In that case, some portion of the insurance proceeds may be unnecessary. Then there is also the reality that the family’s household and living expenses could be less.
That all means that you could consider reducing the annual income multiplier from 20 to 15, which would mean you’d need a policy for $750,000 instead of $1,000,000. That could save you 25 percent or more on the premiums.
Randy Alcorn has a similar perspective on this:
But where does God fit into all this? If a man dies tomorrow, it seems reasonable in this economy to have a moderate amount of funds designated to care for many of his family’s basic needs. On the other hand, to supply them with a huge chunk of money to be appropriated over the next fifteen years until his children are grown, and another thirty years until his wife may die, seems like too much. If life insurance is appropriate, its purpose should be to provide for a family for a season, not to protect them against any and every eventuality, and certainly not to profit them by their loved one’s departure.If you are older, perhaps nearing or in retirement, the amount you need may be a lot less than it was during your early earning years or even middle age. You may be looking at covering specific expenses, such as final expenses or mortgage pay off. Or perhaps you just want something to supplement savings or income. In those cases, you need only buy as much insurance as required.
What about insurance in retirement?
Since I’m getting older, and a lot of readers are at or near “boomer-age,” I thought I’d address the question: “Do I need life insurance when I’m retired?” Well, the simple answer is “it all depends on your specific situation.”
Let’s first consider the case of someone who is getting close to or is already in retirement and is wondering if they need life insurance. The simple answer, is, “no, not if you are essentially ‘self-insured’ to the extent that your Social Security survivor benefits, pension, and retirement savings are sufficient to support your surviving spouse for the rest of their life.” You don’t need a burial policy or one to cover your outstanding debts if you have any. Those can be paid out of your estate.
But if you are living on a very limited fixed income (such as Social Security only), and have little or no savings, it may be of some value. In that case, a very low-cost policy, which may pay out a relatively small amount, may be helpful to help your family cover final expenses and/or pay off debts. Of course, the other option in such cases is to simply save a little each month instead of paying the insurance premium so that a small reserve would be available in the future.
Many retirees may find that they have an old policy that they have had for many years. It may even be a whole life policy that has been completely “paid up” with dividends and regular payments. Or perhaps you have a fixed term plan with or ten years or longer remaining. In those cases, you might want to keep it if:
- You or your spouse, or someone in your immediate family, would be left in serious financial jeopardy in your later years if the other died first (this is especially true for those who need to continue to work in “retirement”);
- You would like to leave someone a large bequest at death, or to cover taxes, debts, or other expenses at death; or
- You are caring for someone with special needs whom you want to be sure is well taken care of long after you are gone.
In reality, many will not need insurance in retirement. If you have saved enough or have other sources of income to essentially “self-insure” (and could, therefore, handle any of the above situations without life insurance), you might want to seriously consider canceling your insurance, especially if you are still paying premiums. But don’t do that without first consulting your insurance professional.
If you are still working and get term insurance through your company – keeping it’s a no-brainer, even if you have to pay a little for it.
As we already discussed, if you own a whole or variable life policy, there could be good reasons to hold on to it. They mainly have to do with the tax advantages of holding onto life insurance. For legacy planning, death proceeds usually go to the beneficiary free of federal income taxes. If you are in ill health or have good reason to believe that you may not live very much longer, keep your policy in effect. For whole life policies, this means that all the increases over and above the premiums that were paid are tax-free income.
On the other hand, if you currently have term life insurance, and it looks like your need for insurance is permanent (i.e., for the rest of your life), then you probably have the wrong kind of insurance. The reason is that the cost for term life becomes more expensive as you get older. You can usually convert term insurance to permanent insurance, though this will also mean paying higher premiums – probably much higher.
You could also consider canceling the term insurance and starting from scratch with a new policy. But never cancel the old policy until the new one is approved, in case it isn’t. And if your health is bad enough so that your life expectancy is short, your best bet might be to just continue the term insurance rather than changing to a more expensive permanent policy.
If you have permanent whole life insurance and there is significant cash value (paid up value plus investment growth), discuss it with your agent. You may want to ask them for an illustration of how the policy might perform in the future. If the policy is paid-up and you continue making payments, the cash value and death benefits will increase. Perhaps you don’t need that additional growth. If not, you may be able to reduce your premium payments or stop them altogether. And if you are viewing it as an “investment,” you may want to keep it even if you aren’t that concerned about the death benefits due to the tax advantages.
Seek advice and counsel
It is crucial that you discuss all the potential scenarios (convert to paid-up status, surrender altogether, etc.) with you agent and evaluate them in light of our total financial situation. Because circumstances do change, your agent may suggest you replace your policy with a new one. (Just be careful if you think he/she is recommending that to get a commission.) In that case, get a second opinion. While you’re at it, review all policy ownership and beneficiary arrangements to ensure they are still consistent with your desires.
No matter what you decide, be absolutely certain you know why you made the choice you did. If you feel any sales pressure whatsoever, defer your decision until you get more comfortable with things and can move forward in faith and with peace.