BY TIM GRANT
Life insurance generally does a good job of doing what it’s mainly intended to do, which is to protect spouses, children and other people who depend on the policy owner financially.
But after years of raising a family, paying off debt and building a retirement nest egg, there often comes a point when the reasons an individual purchased life insurance no longer exist. The kids are on their own; the retirement parties are over.
Conventional wisdom holds that retirees should say goodbye to unneeded policies. But financial advisers say don’t be so quick to drop life insurance.
“These policies may be irreplaceable,” said Marc Tannenbaum, a principal and senior adviser at Signature Financial Planning in Pittsburgh. “Life insurance policies that we obtain at a younger age, we can’t go back and get them later in life.”
After a policy is no longer needed for debt coverage or income replacement, for example, advisers at his firm look to use insurance as a legacy planning strategy.
“We want to know if the client is planning to leave their children or grandchildren money, or perhaps they need the policy for final expenses,” Tannenbaum said. “If long-term care expenses turn out to be higher than expected or planned for, life insurance can help bolster the estate at the end of life and replace the money that had been spent on one’s health care.”
Ultimately the decision comes down to a person’s individual circumstances.
Common thinking is that once the children are grown and retirement is on the horizon, you can drop life insurance, said Edward Kohlhepp, CEO and founder of Kohlhepp Investment Advisors in suburban Philadelphia. “That’s only true for a segment of the population that is struggling to make ends meet.
“For those who have accumulated a reasonable amount for their retirement, my advice would be not to drop life insurance until you’ve had the policy analyzed by a professional.”
Curt Knotick, managing partner for Accurate Solutions Group outside Pittsburgh, said whole life and index universal life polices can be structured to maximize the accumulation value and de-emphasize the insurance value. Some also contain what are called “critical illness riders” that give the insured access to the death benefit in the event of a critical illness, such as a long-term care stay.
Whole life insurance is plain life insurance payable to beneficiaries when the policy owner dies. Whole life policies also accumulate a cash value that can be withdrawn or borrowed against.
An indexed universal life insurance policy offers more flexibility than whole life insurance. This type of policy gives the policy holder an opportunity to allocate cash value amounts to either a fixed account or an equity index account that would track either the S&P 500 or the Nasdaq 100.
The policies allow policy owners to benefit from market gains, with a cap on the upside earnings, usually about 4 percent. But there is no risk of losing any money invested in the policy. The money and growth inside the policy also is 100 percent tax-deferred for life and the cash value can be used to pay premiums.
“Even existing whole life policies that you may have had in effect from when you were younger might be convertible or exchanged into an index universal life insurance policy,” Knotick said.
“Even if the policy owner does not convert these older whole life policies, they may be at the point where the annual dividend is large enough to pay the annual premium, effectively keeping the coverage in force without any additional out-of-pocket cost.”
Kohlhepp, whose firm manages $160 million in client assets, said his retired clients will often keep policies in force for legacy planning when they want to bequeath a specific sum of money to a friend or family member. The policies also are used for charitable giving if they want to leave money to an organization.
“For some people, if they have enough assets, life insurance policies can now be sold in a life settlement,” Kohlhepp said. “There are companies that will buy life insurance policies.”
Life settlements are a controversial but a rapidly growing practice in which senior citizens raise cash by selling their life insurance policies to third-party investors who cash in on the policy when the senior dies. The senior receives an immediate cash payment. The buyer, or investor, pays all future premium payments and receives the death benefit.
“Life insurance itself has other significant advantages,” Kohlhepp said. “One is that the death benefit is income tax free and probate free. And if used properly, you can withdraw cash from the policy income tax free.”
Whole life policies offer an option that allow owners to take out loans against the cash value, said Andy Wolfinger, a retirement planning and Social Security expert at Janney Montgomery Scott in Pittsburgh.
“The main thing you need life insurance for is medical expenses,” he said. “If you think you’ll need long-term care, you can use the life insurance proceeds to pay for it. You can access that money by borrowing the cash value …,” he said.
“The best thing about whole life insurance is it’s a forced savings plan.”