Do We Need Life Insurance?

     Last week I went to the dentist, which in a perverse sort of way got me thinking about insurance -- maybe because getting insurance is about as much fun as going to the dentist. But like going to the dentist, it’s something we need to do.

     So of course we all have health insurance (or we'd better!). If we own a car we have car insurance. If we own a home we have home insurance, and if we rent we might have renter's insurance, at least if we own clothing, jewelry or electronics that are worth anything.

     What about long-term care insurance, or life insurance? Personally, I have long-term care insurance; I do not have life insurance. I gave up life insurance when I retired, about the same time my dependents went off to college and started work.

     But there are other reasons to have life insurance, so I arranged to consult with Brett Wilson, vice president of Ethos, a new company that avoids traditional insurance agents to provide "easy access to modern, simple and ethical life insurance." Wilson himself, with an MS in management from Stanford University, has a decade-plus experience in the insurance industry.

     I started off by admitting that I have no life insurance and asking why I would need it.

     If you don’t have any financial dependents, and don’t have any debts that loved ones would have to assume -- and you also have funds set aside for funeral expenses -- then it isn’t necessary to purchase a life insurance policy. But if you do have dependents – for example, a spouse who is not eligible to continue receiving your pension, or a child who depends on you for college tuition – then you should strongly consider life insurance.

     Okay, so what kinds of life insurance are there? I’ve heard of term insurance, but I know there are others.

     There are two broad categories of life insurance: term life insurance and permanent life insurance. The main objective of term insurance is to provide protection for a specific period of time – presumably the time when you are financially responsible for anyone else such as a spouse or children. The main objective of permanent life insurance is the accumulation of capital, and it generally requires higher premiums than term life insurance. Examples of permanent insurance are whole life and universal life insurance.

      Most of us who are retired no longer have dependents. But I’ve heard that some life insurance can provide long-term care payments. Is that true?

     First of all, to explain, typical stand-alone long-term care insurance policies provide benefits only when the insured needs long-term care. Benefits are provided for services assisting them with activities of daily living like bathing, dressing and eating. To qualify, policyholders have to meet certain criteria such as the inability to perform two or more daily activities, or be diagnosed with cognitive impairment. These services can generally be used at home or in an assisted living environment. The downside to long-term care policies is that they are only accessible when the insured suffers from a qualifying condition. If long-term care services are not needed, benefits are not payable.

     Some life insurance policies combine the death benefit of a life insurance policy with “living benefits” to provide the insured with care while still living. They are sometimes referred to as “combo policies.” These policies (or attached riders) allow for the acceleration of the death benefit related to specific qualifying conditions such as long-term care or terminal illness. The insured can request that a portion of the death benefit be made available for medical bills or long-term care. Accelerating the death benefit will of course reduce the amount payable at the time of death.

      Is there any role for life insurance in estate planning?

     Yes, there can be. Death benefits paid from life insurance policies are generally not subject to federal income tax and, in many cases, state inheritance taxes. There may also be tax benefits associated with the investment component of permanent life insurance policies, although they can be complex. It's a good idea to seek the advice of a tax expert when thinking about this.

     So if I need, or want, life insurance, how much should I get?

     It depends on your financial circumstances. You can compare your current debts and financial obligations against your assets and aim for life insurance to cover the difference. So ask yourself if your spouse or partner could assume any debt payments (like a mortgage) and living expenses in your absence. If they have their own income, how long would that sustain them in the event of your death? Have you already put away money for your own funeral costs? Again, you want to cover with life insurance what you can’t cover with the assets you leave behind.

     One last question. If we buy life insurance now, how can we be assured that 10 or 20 years from now, when we die, that the company will still be around and able and willing to pay benefits?

     Ethos partners with industry giants including Legal & General America as carriers, as well as reinsurance companies like RGA, to make sure the financial assets are sufficient to pay benefits for many years into the future.

     So, I'm convinced that life insurance can be complicated, but it can also be important. Right now, Wilson told me, some 70% of families in the U. S. would go bankrupt within three months if their primary breadwinner died. As a result, more and more people end up relying on crowdsourcing tools like GoFundMe, just to raise money for funeral costs. I, for one, would not want to leave my partner or loved ones with that burden.

     I'm not promoting Ethos. I have not dealt with them. And I probably will not get life insurance, mostly because I already have long-term-care insurance. But this is all something to think about, to discuss with your loved ones and perhaps your financial adviser. And I have to say, if I had it to do over, I might just go another way.