Life insurance is a complicated and often frustrating topic, particularly during the life changes that accompany retirement. It’s important to understand how life insurance works, and what its purposes are, to ensure that you can make proper decisions regarding what kind of insurance you might need.
Term Life Insurance
Life insurance comes in two broad categories: term life insurance, in which the insured makes premium payments during the life of the policy, with the named beneficiaries receiving a death payment should the insured die while the policy is active; and whole life policies, which also feature a death benefit but carry a cash value at the same time.
The traditional purpose of life insurance is to replace lost income should a wage earner die and leave his or her dependents without a reliable source of income. For instance, should a 50-year-old who earns $100,000 a year suddenly die, $1.5 million in potential future income is lost — representing the wage earner’s salary for fifteen years into the future, to the standard retirement age of 65. Should that 50-year-old take out a term policy that provides a survivor benefit of $1.5 million, his family is fully covered against loss for the entire benefit period of fifteen years. When the earner retires at age 65, there will be no more working income to be replaced, and the earner can cancel the policy.
Life Insurance Policy
Term policies, of course, can have benefits other than replacing lost income. If the wage earner anticipates that his or her heirs will face a substantial inheritance tax — for instance on a small, family-owned business — a term policy’s payout can be used to pay the tax and allow the heirs to keep the company. A death benefit can also be used to pay off accumulated debts, or a mortgage. For most retirees, canceling a term life policy makes sense, but there may be good reasons to keep a policy active, even given the expense of the premium payments.
Whole Life Insurance
Whole life policies, on the other hand, are savings vehicles as well as insurance policies. Premium payments are larger than term life premiums, as a portion of each premium payment will go into an account and be invested, allowing the money to appreciate (or decline) in value, depending on market fluctuations and how the funds are invested. Most financial planners advise against whole life policies; they involve high fees, and are often invested in such a way that does not provide maximum benefit. Most advisors suggest that investors purchase term policies for their insurance needs, and invest their savings through cheaper investment products, such as investing directly in no-load mutual funds.
Moreover, whole life policies are sold by marketing to senior citizens, and marketing practices are not always on the level. These policies are sold on a commission basis, paying high commissions to brokers. Given that this is how insurance brokers make a living, they often suggest products that may be inappropriate for individual seniors. Sales commissions add a layer of uncertainty — and add substantially to the cost — of whole life policies.
However you choose to provide for your insurance needs, be sure to research the topic thoroughly, and seek professional advice if needed from an advisor who has your best interests at heart.