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    Reader’s Question: Is life insurance a good investment?

    May 11, 2018

    Question: I’m 62 and about to retire. Should I keep my term life insurance, or should I invest in a permanent life insurance policy?

     

    Scott Hanson: I really like this question because it speaks to a lot of the people I meet who are on the brink of retirement.

    First, let me address your need for life insurance after age 62.

    For many of the people I work with who are in a similar stage of life, and about to retire, I often recommend they forego life insurance altogether.

    That’s because, as a guideline, the older you are, the less likely it is that you still need it.

    But there are always exceptions.

    Generally, the circumstances under which you might want to continue carrying life insurance after 62 are not all that different from the need for life insurance when you’re younger.

    First, a quick disclaimer: We don’t sell life insurance. We are licensed to because it allows us to provide detailed risk management recommendations as part of the comprehensive financial plans we create for clients.

    Which brings us to term life, which is typically the only kind of life insurance I’d recommend, and which is, in a sense, insurance that you rent.

    With term life, once you are qualified, if you keep making the payments you stay covered. If you die within the term period (be it 10 years, 20 years, etc.), your beneficiaries receive a payout. Stop making payments, and your contract lapses and you’re no longer covered.

    Pretty straightforward.

    Going deeper, how can you determine whether you should continue paying for your term life insurance?

    When considering insurance as a financial hedge against your death (and not as an investment), answer these questions:

    • Do you still have dependents?
    • What’s your annual income?
    • Do you still receive all or most of your income from work?
    • When will you retire?
    • How much money have you saved?
    • What is your net worth?
    • Do you receive a pension or other payments that would cease if you were to die?
    • Do you have debt (including a mortgage)?

    If you’ve saved well, you’re about to retire, your kids are out of the house (and no longer dependent), you have no (or little) debt, and your retirement income will be entirely derived from your investments, a pension, retirement accounts, and Social Security, the odds are pretty good that you no longer need life insurance. That’s because you have no income to replace, and no one would suffer financially were you to pass away. (Just make absolutely certain that your will is up to date, and, just as importantly, that the beneficiaries on your retirement account(s), which actually supersede the entities listed in your will, are also up to date.)

    There are, of course, other considerations. When it comes to continuing to carry term life insurance, you’ll want to speak with a credentialed, fee-based advisor to determine the very best course of action for you.

    Life insurance as an investment.

    As for the second part of your question, I’m against permanent life insurance as an investment.

    First, permanent life insurance with a cash value is life insurance combined with an investment or savings-like component that increases in value over time.

    So why am I opposed to it?

    First, it’s expensive. Whereas a 10-year duration term life insurance policy might run a healthy 50-year old $1,300 a year (for a $500,000 death benefit), that same whole life policy with a cash value could run you almost 10X that amount (over $11,000) a year.[2]

    And what about the savings component of permanent life?

    While you may find yourself being sold on the advantages of “forced savings,” many retirement accounts (such as 401ks)) not only provide you this very same facet, they also provide you with a wide array of investment options and risk tolerances.

    The same thing goes for tax-deferred growth. I’m a fan. And while permanent life has it, so do most retirement accounts.

    While there are other things to consider, something I’ve noticed about permanent life insurance is how many policyholders simply give up on it. Even I was a bit surprised to find that a full quarter of all policyholders stop making payments inside of three years.[3] And the number of people who drop their policies actually jumps to about 40% before the ten-year mark.[4]

    While there are certainly a lot of reasons that people may let their policies lapse, my experience has been that the two main reasons are, first, the payments just become too onerous to maintain, and, second, once policyholders become educated about the other investment options available to them, they simply decide to put their money someplace else.

    Conclusion

    Since you’ll be retiring soon, and you’ll likely no longer be earning an income that would have to be replaced (in the event of your death), you probably don’t need life insurance. But the nature of your question tells me that you aren’t yet working with a fiduciary advisor, and that you might be getting pushed to buy something from a commission-only salesperson.

    The transition to retirement is complex and tricky. Be careful! Financial mistakes made at this juncture of life are harder to recover from than when you were 30. Get a second opinion, today.

    [1] http://money.cnn.com/retirement/guide/insurance_life.moneymag/index9.htm
    [2] http://money.cnn.com/retirement/guide/insurance_life.moneymag/index9.htm
    [3] https://www.marketwatch.com/story/10-things-life-insurers-wont-tell-you-1308333194735
    [4] https://www.marketwatch.com/story/10-things-life-insurers-wont-tell-you-1308333194735
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