Thursday, January 16, 2020

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.

10 comments:

DJan said...

I am retired, living on my annuities and Social Security. My husband will continue to receive the annuities if I were to die first, and he would also get my larger Social Security payments. So without any children to worry about, I don't feel any need to have life insurance. But if I were thirty years younger, it would be different. Good post, Tom. Lots to ponder. :-)

David @iretiredyoung said...

Useful post Tom. I used to have life insurance through my employer and also in connection with a mortgage that I subsequently paid off. The employer insurance disappeared when I retired and I cancelled the other policy about a year ago. When I had dependents these life insurances where necessary but our current financial situations means they're no longer required.

I hadn't heard about long term care insurance before. With the cost of care, this may be something that I should look into.

Greenhill39 said...

Some retirement investment books are now suggesting life insurance to cover taxes on your heirs inherited IRA accounts, any state taxes or federal estate taxes, and for upkeep of any family vacation properties.

Janette said...

No insurance here. Our kids are grown. Funerals requested are super simple. National cemetery burial (unless my husband gets his way and he is dumped into the lake —- yuck). We have a dedicated account for such things. It does remind me to put my kids on those accounts as joint owners.
Both of my 30 something children have good amounts of life insurance on both partners of their marriage. My son in law’s 53 year old dad passed suddenly. He was a farmer. Thank the Lord he had insurance. They would have been in a world of hurt burying him.....the insurance also paid for the lawyer as they figured out the estate (no will).
Long term health care? Still not convinced it will be around when I need it. Good information I will give it more thought.

gigi-hawaii said...

David had term life insurance, but it expired. I had life insurance, but stopped when the premium seemed so high.

Anonymous said...

My mothers only sibling died at just about 100 years of age, she outlived everyone and was single..She owned many rental properties and many homes..She was bugged by relatives for money her whole life..I had a brother call me who got a lot, he was horrible to me growing up and sounded miserable but rich just like my aunt...I say be kind and loving and screw the life insurance policies and inheritances..I never wante4 a dime from my aunt lived in the same city in California and never asked for one damn dime..I was thankful she never left me anything cause I would never live like she did cruel and mean and cheap...

Kathy @ SMART Living 365.com said...

Hi Tom! No insurance for us either--including long term health. We believe we are self-insured because we are definitely making financial plans for it. We know it's a risk, but isn't all life. And with no children or heirs to speak of, all we really plan to do is have our cremation plans in place and paid for. Still, I can understand how others might see the need. Still, like all insurance it is so very expensive. ~Kathy

Kay said...

My husband has a bit of a life insurance, but it's whole life. As for long term health insurance, he heard that it's usually for just a given amount of time and hard to collect with so many rules attached. Also, if you don't use it, you lose it. So we set up our own savings to cover that cost. My in-laws had long term health care, but the premiums kept rising so much that they dropped it. It's really hard to decide what to do.

Barbara said...

I always had life insurance through my work. Now that I am retired I do not have any. I would love to have a long term care policy.

Affordable Life Insurance said...

As per my opinion, everyone needs life insurance. It is an essential part of financial planning and a grand way to provide for the future need for cash.