Money Matters

Money Matters: Do you need life insurance? Consider these issues.

CorrespondentMay 31, 2014 

Q. My husband and I are in our mid-60s and retired. We have just updated our wills, POAs, health care proxies, etc. We have no debt (house and cars paid for) and my husband has a pension and an individual retirement account in addition to his Social Security. I have Social Security and an annuity, which matures in a year and a half. We are planning to prepay our funerals so everything will be taken care of upon our deaths so our one child will not have to deal with everything.

We both currently carry a term life insurance policy (his is at $100,000 and mine at $50,000), which is in effect until he is 73 and I am 72, as long as we pay the premiums. He also has life insurance through his past employment.

What I’d like to know is this: Our insurance company is suggesting we convert our policies to one that will cover us up to the age of 121. The policy costs will remain the same for the duration and be about what we’re paying now, but only for $10,000 worth of coverage. My husband does not want to convert the policy and thinks we should wait till the present one lapses, but I know the rates then would be sky high.

So, in your opinion, do you think it is really necessary to have life insurance at this point? With no debt, our current income through Social Security, pensions, and our savings, do you think we are throwing our money away by continuing with our current policy or even converting it? We have more than $10,000 in savings, and our beneficiary would be able to use that if need be. What do you think?

A. Congratulations, it sounds like you have done a good job with your estate and retirement planning. The need for any life insurance at this point in your lives depends on the living expenses required by the surviving spouse and the remaining income sources upon the first spouse’s death. The following issues should be taken into consideration when deciding if insurance is needed in retirement.

• Currently, your income sources are from a pension, two Social Security benefits and perhaps withdrawals from an IRA and an annuity. When one spouse predeceases the other, the combined Social Security benefits will be reduced to an amount roughly equal to that of the spouse with the higher benefit. This can result in a significant reduction in cash flow if each of you currently receives a high benefit.

• What happens to your husband’s pension if he should predecease you? If he took a single life option, you may need insurance to make up for the loss of the pension income. If he selected one of the joint survivor options, it may not have much of an impact on your cash flow.

• Does your annuity pass to your husband upon your death? If not, why and if so, will potential income from the annuity compensate for the reduction in Social Security benefits if you should predecease him?

• Are you the beneficiary of your husband’s IRA? If not, why and if so, will potential income from the IRA compensate for any reduction in income as a result of reduced Social Security benefits or pension income?

• When one spouse dies, some expenses – such as medical, food, car maintenance, etc. – are reduced, so keep this in mind when you are determining how much income you would each need as a surviving spouse. If you each think you would be fine financially on our own, I’d drop the term coverage now. If you are worried, I’d keep it in place until it lapses.

Based on your current savings and the fact that you are planning to prepay for your funerals, I don’t see any need to convert and continue to pay premiums for a $10,000 death benefit.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624

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